Annual Report 2013
Contents
Corporate Information.........................................................................................................................................1
Financial Highlights.............................................................................................................................................2
Chairman’s Statements.........................................................................................................................................3
Management Discussion and Analysis.................................................................................................................8
Director and Senior Management......................................................................................................................23
Directors’ Report................................................................................................................................................27
Corporate Governance Report...........................................................................................................................34
Independent Auditor’s Report............................................................................................................................42
Consolidated Statement of Profit or Loss and Other Comprehensive Income..................................................44
Consolidated Statement of Financial Position...................................................................................................45
Consolidated Statement of Changes in Equlity.................................................................................................47
Consolidatied Statement of Cash Flows............................................................................................................48
Notes to the Consolidated Financial Statements................................................................................................50
Annual Report 2013
Corporate Information
Board of Directors
Auditors
Executive Directors
Deloitte Touche Tohmatsu
Certified Public Accountants
Mr. LAM Kong
Mr. CHEN Hongbing
Ms. CHEN Yanling
Mr. HUI Ki Fat
Ms. SA Manlin
Principal Bankers
China Merchants Bank, Shenzhen Branch
Industrial and Commercial Bank of China, ShenZhen Branch
Standard Chartered Bank (Hong Kong) Limited
Bank of Communications Co., Ltd., Hong Kong Branch
Independent Non-Executive Directors
Mr. CHEUNG Kam Shing, Terry
Dr. PENG Huaizheng
(resigned on 9 October 2013)
Mr. HUANG Ming
(appointed on 9 October 2013)
Mr. WU Chi Keung
Registered Office
Maples Corporate Services Limited
PO Box 309
Ugland House
Grand Cayman, KY1-1104
Cayman Islands
Company Secretary
Ms. ZHANG Lingyan
Headquarters
Authorized Representatives
6/F and 8/F, Building A Tongfang Information Harbour
No.11 Langshan Road
Hi-tech Industrial Park North
Nanshan District
Shenzhen 518057
PRC
Ms. ZHANG Lingyan
Mr. LAM Kong
Audit Committee Members
Mr. WU Chi Keung (Chairman)
Mr. CHEUNG Kam Shing, Terry
Dr. PENG Huaizheng
(resigned on 9 October 2013)
Mr. HUANG Ming
(appointed on 9 October 2013)
Principal Place of Business in Hong Kong
Unit 2106, 21/F
Island Place Tower
510 King’s Road
North Point
Hong Kong
Remuneration Committee Members
Dr. PENG Huaizheng (Chairman)
(resigned on 9 October 2013)
Mr. HUANG Ming (Chairman)
(appointed on 9 October 2013)
Mr. CHEUNG Kam Shing, Terry
Mr. WU Chi Keung
Branch Share Registrar in Hong Kong
Computershare Hong Kong Investor Services Limited
Shops 1712-1716, 17M, Hopewell Centre
183 Queen’s Road East
Wanchai
Hong Kong
Nomination Committee Members
Mr. CHEUNG Kam Shing, Terry (Chairman)
Mr. LAM Kong
Dr. PENG Huaizheng
(resigned on 9 October 2013)
Mr. HUANG Ming
(appointed on 9 October 2013)
Mr. WU Chi Keung
Stock Code
867
Company’s Website
www.cms.net.cn
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Annual Report 2013
Financial Highlights
●●
●●
●●
●●
Turnover up 28.9% to US$363.3 million (2012: US$281.9 million)
Profit for the year up 20.6% to US$102.7 million (2012: US$85.1 million)
Basic earnings per share up 20.9% to US4.258 cents (2012: US3.522 cents)
As at 31 December 2013, the Group’s bank balances and cash amounted to US$80.0 million while
readily realizable bank acceptance bills amounted to US$26.0 million
Proposed final dividend of US0.863 cent per share, bringing the total dividend for the year ended 31
December 2013 to US1.701 cent per share, representing an increase of 19.9% from last year (2012:
final dividend of US0.774 cent and total dividend of US1.419 cent per share respectively)
●●
Turnover and profit of the Group for the latest five years are set out below:
Turnover (US$’ million)
’ million)
120
400
350
100
300
80
250
60
200
150
40
100
20
50
0
0
Consolidated Balance Sheet Highlights
2009
US$’000
Total assets
Total liabilities
Net assets
90,777
36,843
53,934
As at 31 December
2010
2011
US$’000
US$’000
223,207
23,218
199,989
-2-
474,167
82,994
391,173
2012
US$’000
2013
US$’000
552,767
101,793
450,974
629,012
105,141
523,871
Annual Report 2013
Chairman’s Statements
Dear Shareholders,
This is the third year since China Medical System Holdings Limited (the “Company” or “CMS”) transferred
its listing platform from the Alternative Investment Market in London to the Main Board of the Hong Kong
Exchanges and Clearing Limited (“HKEx”). On behalf of the Board of Directors of the Company, I would
like to sincerely thank all of our shareholders for their unwavering support in these three years, and would
also like to present the Annual Report of the Company and its subsidiaries (the “Group”) for the year ended
31 December 2013 (the “Reporting Period”).
Business Review
The year 2013 was one in which the Chinese healthcare market experienced a number of changes and
adjustments. In the second half of 2013, the introduction of regulatory policies relating to the healthcare
industry, in particular the anti-corruption measures pushed forward by the government exerted a certain
impact on the overall growth of the Chinese healthcare industry. However, the rapid growth of China’s aging
population, the increase in per capita disposable income, as well as the deepening of government policies
with regard to medical reforms, etc., continued to give impetus to overall growth of the Chinese healthcare
market. In the long run, a more moderate policy environment, strong demand for pharmaceutical products
and a solid industry foundation will drive the sustained development of the Chinese healthcare market.
In 2013, the Group stayed vigilant and was well prepared for various scenarios, focusing on optimizing
its intrinsic value. Under the volatile external market conditions, the Group refined its market layout and
network segmentation and strengthened internal management in a bid to reduce the adverse impact brought
by fluctuations in the industry. During the Reporting Period, the Group recorded turnover of US$363.3
million (2012: US$281.9 million), representing an increase of 28.9% over the same period of last year, while
profit for the period reached US$102.7 million (2012: US$85.1 million), up 20.6% from last year. Basic
earnings per share was US4.258 cents (2012: US3.522 cents), representing an increase of 20.9% over the
same period of last year.
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Annual Report 2013
Production Introduction and Development
The Group believes that a premium product portfolio with distinct levels and reasonable structure serves
an important foundation for the Group’s sustainable development. During the Reporting Period, the Group
committed to identifying high quality prescription drugs on a global scale that would meet the demand
for the Chinese market and would also be suitable for promotion by the Group. In 2013, the stability and
controllability of product rights continued to be the preferred strategic considerations of the Group’s product
introduction. Meanwhile, to ensure the products’ long-term development, for controllable products, the Group
leveraged its capabilities in financing, production and sales to effectively integrate its product resources and
optimize the developmental foundation of its products. The Group successfully signed agreements with two
foreign pharmaceutical manufacturers in 2013 to introduce four products. In particular, the Group introduced
three high-quality herbal medicine products in consideration of certain payments to Max Zeller Söhne AG
(“Zeller”), a Swiss pharmaceutical company. This was a successful attempt in which the Group obtained
a product with long-term (30-year) exclusive market rights in China for its Direct Academic Promotion
Network (the “the Direct Network”). Another newly introduced product is Stimol®, the Group achieved
cooperation with Biocodex of France once again and signed an agreement for exclusive promotion and
distribution the product in China during the Reporting Period. The new in-licensed products mentioned above
require import drug registration in China. In addition, during the Reporting Period, the Group successfully
acquired a 100% equity interest in Sinopharm Traditional Chinese Medicine Lengshuijiang Pharmaceutical
Co., Ltd. (subsequently renamed Kangzhe Lengshuijiang Medical Co., Ltd., “Kangzhe Lengshuijiang”),
thereby securing the product rights of GanFuLe, a product previously marketed by the Group. Meanwhile,
to secure the stable and long-term production capability of XiDaKang, a controllable product under the
Agency Promotion Network (the “Agency Network”), the Group not only acquired the entire product rights
during the Reporting Period, but also made a series of arrangements for its production in order to lay a sound
foundation for the future development of the product.
For the development of its current portfolio, the Group has actively capitalized on the opportunity arised
from the adjustment of organizational structure of the Direct Network during the Reporting Period to
continue refining its regional network, facilitate the regional layout of its products and enhance the sales
coverage of new hospitals, thereby continuously expanding the market coverage of products in terms of the
breadth and depth. Meanwhile, the Group actively explored the potential of hospitals which has generated
sales of our products and increased the prescriptions volume of products during the Reporting Period. For
products under the Agency Network, the Group consistently modified the Agency Promotion Model during
the Reporting Period, identified new agencies in untapped markets for products and encouraged agencies
to step up efforts in market development as well as hospital coverage. Meanwhile, for products that require
certain degree of academic support under the Agency Network, the Group offered specific training programs
for these products during the Reporting Period so as to continuously enhance the agencies’ academic capacity
and knowledge for these products.
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Annual Report 2013
Tyroserleutide (CMS024), a polypeptide National Class One New Drug researched and developed by
the Group, is used to treat primary liver cancer. The Group enrolled all subjects of phase III clinical trial
of Tyroserleutide during the Reporting Period, and convened the blind data review of the clinical trial in
Shanghai, China to unblind the data and conduct preliminary statistical analysis on 28 February 2014.
Preliminary analysis results indicated that the subgroup with tumor thrombosis in the hepatic portal vein
branches of which subjects were in severe condition and with poor prognosis interfered with the primary
efficacy evaluation of the clinical trial such that the clinical trial failed to achieve its aim to register for
selling the drug in the Chinese market. The clinical trial demonstrated a favorable trend for Tyroserleutide
on Recurrence Free Survival (RFS) and Overall Survival (OS) in the subgroup with no tumor thrombosis in
the hepatic portal vein branches of which the subjects were in better condition and with favorable prognosis,
and the OS in particular approaching statistical significance. Based on the situation, the Group believes
that further research focusing on patient population with milder condition (such as subjects with no tumor
thrombosis in the hepatic portal vein branches) with OS as the primary endpoint is highly recommended. The
Group and Kangzhe Pharmaceutical Research and Development (Shenzhen) Limited (“Kangzhe R&D”) have
decided to kick off a follow-up clinical trial for Tyroserleutide based on it.
Moreover, the Group has other five products in the early stages of application for import drug registration.
The Group will actively facilitate the registration process of relevant products.
Network Expansion
The Group has committed to establishing a marketing and promotion network with broad coverage, strong
penetration, high overall quality, clear management hierarchy, and outstanding flexibility and effectiveness
in the China market. Thus, during the Reporting Period, the Group further expanded the scale of the
marketing and promotion network and also strengthened the management and professional training of the
network. Meanwhile, the Group further improved the information management system during the Reporting
Period, and reinforced the refined management of the two marketing and promotion networks of the Group.
Furthermore, strengthening the penetration of the marketing and promotion network and promoting the
development to the rural market were also key focuses of network development of the Group during the
Reporting Period.
To ensure market segmentation, effective expansion into untapped markets, reinforcement the penetration
of the marketing and promotion network into rural market and the flexibility of business management, the
Group started to refine the organizational structure of the Direct Network since the end of 2012. During the
Reporting Period, the new organizational structure commenced operation. To allow the new organizational
structure to run efficiently as soon as possible, the Group has strengthened the real-time monitoring and
regular feedback of the organizational performance under the refined network and continued to enhance and
optimize the new organizational structure and relevant policies in light of market changes to enable the new
structure to go through the transition period smoothly. Meanwhile, the Group completed large-scale new staff
recruitment and training during the Reporting Period, and kicked off a new round of campus recruitment in
order to continuously accommodate the demand for sales talents for the expansion and segmentation of the
Direct Network.
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Annual Report 2013
On the Agency Network front, the Group continued to identify high quality agents for products in untapped
markets and hold training sessions to improve its agents’ knowledge of the Group’s products during the
Reporting Period. Meanwhile, the Group strengthened the information management of the Agency Network
in areas ranging from agent identification to contract signing and product delivery during the Reporting
Period, with every key aspect of sale process of the Agency Network fully incorporated into the information
management system. In addition, the Group also actively discussed how to capitalize the merits of the
Agency Promotion Model during the Reporting Period in order to achieve the optimal allocation of agents’
resources during product sales.
Cash Dividend
The Company has paid an interim dividend of US0.838 cent (equivalent to HK$0.065) per ordinary share of
the Company (the “Share”) for the six months ended 30 June 2013. The Board is delighted to recommend a
final dividend of US0.863 cent (equivalent to HK$0.067) per Share for the year ended 31 December 2013
to shareholders whose names appear on the register of members of the Company at the close of business on
Monday, 12 May 2014 (the “Record Date”). The register of members of the Company will be closed from
Thursday, 8 May 2014 to Monday, 12 May 2014 (both days inclusive). In order to qualify for the proposed
final dividend for the year ended 31 December 2013, all transfers accompanied by the relevant share
certificates must be lodged with the Company’s branch share register in Hong Kong, Computershare
Hong Kong Investor Services Limited at Shops 1712–1716, 17M Floor, Hopewell Centre, 183 Queen’s
Road East, Wanchai, Hong Kong for registration no later than 4:30 p.m. on Wednesday, 7 May 2014.
Payment of the final dividend in Hong Kong dollars is expected to be made to the shareholders on Monday,
19 May 2014 upon shareholders’ approval at the Annual General Meeting (“AGM”) of the Company dated
on Wednesday, 30 April 2014.
Outlook and Future Development
Internal adjustments carried out in 2013 were aimed at laying a more solid foundation for large-scale
development in the future as the Group invests effort on product introduction and development, as well as
network expansion and segmentation. Meanwhile, more detailed and effective business management, higherquality talents and more stable sales teams will further strengthen the Group’s future development.
In respect of product introduction and development in the future, the Group will be constantly committing
to new product introduction by continuing to identify premium products with certain market differentiations
and favorable academic features and adhering to taking effective control of product rights as the top priority
during negotiations to cooperate on products. In the future, based on the securing of stable product rights, the
Group will promote prosperous development of products in the China market with more ample resources and
refined market planning. Meanwhile, the Group will also continue to facilitate the application of its existing
products under registration for launching in the market. This is an important endeavour of the Group’s
sustainable development in the future.
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Annual Report 2013
With regard to the future development of the network, the Group will continue to expand the scale of the
marketing and promotion network, further strengthen its network coverage, continuously expand its network
to the rural market, and focus on improving the efficiency and professional standards of the network. The
Group will further enhance the reasonable layout of its marketing and promotion network and reinforce its
headquarters’ supervision and management over the network operation. The Group will also further establish
a strong training and academic communication platform for the development of the marketing and promotion
network and further improve various incentive mechanisms to consistently promote the healthy development
of the network.
Since its listing on the HKEx three years ago, the Group has been adhering to the commitment of
accountability to shareholders, constantly cultivating an outstanding enterprise that is pragmatic and
proactive, exercising stringent internal control, and ensuring efficient management. The Group will
continuously devote itself to society and human health and will continue to strive in the future!
Chairman
Lam Kong
Shenzhen China
26 March 2014
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Annual Report 2013
Management Discussion and Analysis
Business Review
During the Reporting Period, the Group recorded turnover of US$363.3 million (2012: US$281.9 million),
representing a year-on-year increase of 28.9%, while profit for the period reached US$102.7 million (2012:
US$85.1 million), up 20.6% year-on-year. Basic earnings per share was US4.258 cents (2012: US3.522
cents), representing a year-on-year increase of 20.9%.
The year 2013 was a year of adjustments for the Group. During the Reporting Period, the Group was
confronted with some challenges – the Direct Network sought to rapidly complement the market after
adjustments in its organizational structure and personnel; two major products, Augentropfen Stulln Mono
Eye-drops and ShaDuoLiKa, could not cater to market demand due to the inadequate production capacity
of the manufacturers. In the third quarter of 2013, the growth of the overall Chinese healthcare market
dampened due to the Chinese governmental anti-corruption measures which affected the growth of the
Group to a certain extent. With the gradually flourishing operation of the adjusted organizational structure
of the Group’s Direct Network, the progressively improved supply capacity of product manufacturers, more
moderate policy environment of the industry and constantly improved internal management, the Group
believes it will continue to maintain sustainable and steady growth in the future.
Product Introduction and Development
Products are considered the soul of the Group’s sustainable development. Stable and controllable product
rights will be the Group’s primary strategic consideration as well as the key objective of the Group’s product
development. Regarding the introduction of new products, the Group continued to pay upfront fees, equity
investment, etc., to have effective control of marketing rights of products in China. During the Reporting
Period, the Group obtained three herbal medicine products from Zeller, a Switzerland pharmaceutical
company, via certain consideration payable for 30 years of exclusive rights to import, register, sell, market,
promote and distribute the products in the China market for its Direct Network, which fully guaranteed the
Group’s steady rights on these three products. During the Reporting Period, the Group also completed the
acquisition of a 100% equity interest in the manufacturer of GanFuLe, a drug that was previously marketed
by the Group, and achieved effective control of the drug. Meanwhile, to assure the long-term development of
XiDaKang, during the Reporting Period, the Group on one hand obtained 100% product rights of the product,
and on the other hand, utilized its existing production base located in Li County, Hunan Province to produce
the product. The production of XiDaKang shifted from Guangxi Province to Hunan Province has effectively
integrated production resources and thereby guaranteeing steady and lasting supply of the product in the
future. Meanwhile, to ensure the reliability of the raw materials for the product, the Group also invested in
and constructed an agricultural base in Li County, Hunan Province for the supply of the main raw materials
of the product to ensure the quality of the product from the origin. In addition, the Group achieved successful
cooperation with Biocodex of France once again and signed an agreement with it for exclusive promotion
and distribution its product Stimol® in China during the Reporting Period.
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Annual Report 2013
In terms of the market development of products, due to the untimely expansion of the production capacity
of the manufacturer of Augentropfen Stulln Mono Eye-drops and the refurbishment of the manufacturer of
ShaDuoLiKa in accordance with the latest Chinese GMP requirements, the supply of these two products
failed to meet the development needs of the China market and thereby posed a certain negative impact on
their sales in the first half of 2013. Other products of the Group still achieved sustained sales growth during
the Report Period. The supply of these two products started to recover gradually from the second half of
2013.
During the Reporting Period, flagship products Deanxit and Urosofalk under the Direct Network of the
Group have relatively broad hospital coverage, and their product images have won the support of doctors
and patients after decades of promotion. During the Reporting Period, the Group continuously contributed
to building a professional academic brand image for the two products and took the initiative in searching
for new growth points and breakthrough of products with the opportunity of further extending the Direct
Network to the rural market. In terms of the four potential products under the Direct Network - XinHuoSu,
Augentropfen Stulln Mono Eye-drops, Salofalk and Bioflor - the Group concentrated on improving the
regional market layout of the products, constantly enhancing hospital coverage and department expansion
and at the same time strengthening Chinese doctors’ understanding and recognition of products by holding
multi-layer academic activities. Regarding the development of product under the Agency Network, given
the intense market competition, the Group continued to adjust and optimize the structure of its current
agencies and enhanced the requirements upon product market development and hospital coverage, and
thereby effectively promoted the sustainable development of products under the Agency Network during
the Reporting Period. Meanwhile, for products with certain academic demands and exclusiveness under the
Agency Network (such as XiDaKang and Yin Lian Qing Gan Ke Li), the Group proactively discussed with
agents for a more effective, longer-term and stable cooperation pattern during the Reporting Period.
The phase III clinical trial of Tyroserleutide (CMS024), a polypeptide drug used to treat primary liver
cancer, researched and developed by the Group with independent intellectual property rights, saw substantial
progress during the Reporting Period, fulfilling all enrollments of 300 subjects and unblinded clinical trial
data by 28 February 2014. In addition, of the nine products of the Group now undergoing import drug
registration application in China, four were newly signed during the Reporting Period. The Group has been
active in promoting these applications in accordance with each requirement of the CFDA.
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Annual Report 2013
(i)
Products under the Direct Network
Main Products
Deanxit
(Flupentixol and Melitracen)
Ursofalk
(Ursodeoxycholic Acid)
As a Percentage of the Group’s Revenue (%)
27.9
20.1
XinHuoSu
(Nesiritide, Lyophilized Recombinant Human Brain
Natriuretic Peptide, “rhBNP”)
Salofalk
(Mesalazine)
Bioflor
(Saccharomyces Boulardii)
Augentropfen Stulln Mono Eye-drops
(Escuilin and Digitalisglycosides Eye-drops)
10.1
4.5
4.1
3.6
Deanxit (Flupentixol and Melitracen)
Deanxit is manufactured by H.Lundbeck A/S of Denmark and is used for the treatment of mild to moderate
depression and anxiety. During the Reporting Period, Deanxit recorded sales of US$101.5 million, an
increase of 15.2% when compared to last year, accounting for 27.9% of the Group’s turnover. Deanxit still
maintained steady growth during the Reporting Period, mainly benefitting from the sustainable efforts of the
Group to mold its brand image as well as discover its potential for growth. In addition, during the Reporting
Period, the Group strengthened the academic promotion in the rural market, which effectively boosted
its development in rural areas. As at 31 December 2013, sales of Deanxit covered over 10,700 hospitals
throughout China. Due to the friendly cooperation with its manufacturer over decades, as well as the
favorable development of Deanxit in China market, the Group has managed to renew its exclusive promotion
and sales agreement for the China market for another five years during the Reporting Period.
Ursofalk (Ursodeoxycholic Acid)
Ursofalk, manufactured by Dr. Falk Pharma GmbH of Germany, is used for the treatment of cholesterol
gallstones, cholestatic liver disease and bile reflux gastritis. During the Reporting Period, Ursofalk recorded
sales of US$73.1million, an increase of 20.3% when compared to last year, accounting for 20.1% of the
Group’s turnover. During the Reporting Period, the Group continued to work on penetration of the product
in core markets and gradually started to extend coverage to surrounding markets. Furthermore, during the
Reporting Period, the Group further participated in high-end academic activities to continuously elevate the
professional academic image of the product. As at 31 December 2013, sales of Ursofalk covered over 5,900
hospitals throughout China.
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Annual Report 2013
XinHuoSu (Nesiritide, Lyophilized Recombinant Human Brain Natriuretic Peptide, “rhBNP”)
XinHuoSu, manufactured by China Chengdu Rhodiola Biological Pharmaceutical Co., Ltd, is a National
Class One biological agent used to treat acute heart failure. During the Reporting Period, XinHuoSu
recorded sales of US$36.6 million, an increase of 36.6% when compared to last year, accounting for
10.1% of the Group’s turnover. During the Reporting Period, the Group accelerated the improvement of its
regional sales layout and specified the promotion proposal and continued to promote further recognition
of the efficacy of the product by doctors with the help of clinical academic platforms. As at 31 December
2013, sales of XinHuoSu covered over 1,200 hospitals throughout China. Due to technical modifications
to both the production lines of lyophilized BNP and relevant ancillary facilities by the manufacturer of
the product to meet the latest Chinese GMP requirements, production of the product was suspended on 31
December 2013. The manufacturer has prepared sufficient inventory in line with the market situation after its
communication with the Group, and committed in the announcement which released on 24 December 2013
that the current inventory of XinHuoSu was sufficient to satisfy market demand before the completion of
GMP refurbishment. As such, the Group has received the entirety of its promised inventory. The exclusive
agreement for promotion and sales of XinHuoSu in China signed by the Group and the manufacturer expired
on 31 December 2013, and the Group is currently in negotiations with the manufacturer to discuss further
cooperation on the product.
Salofalk (Mesalazine)
Salofalk, manufactured by Dr. Falk Pharma GmbH of Germany, is mainly used to treat Ulcerative Colitis
and Crohn’s disease and is consisted of three dosage forms, namely: coated tablets, suppositories and
enemas. During the Reporting Period, Salofalk recorded sales of US$16.3 million, an increase of 42.9%,
when compared to last year, accounting for 4.5% of the Group’s turnover. During the Reporting Period,
the Group intensified efforts in market development of the product, further deepened hospital development
and department penetration of the product, and particularly enhanced the development and promotion of
formulation for topical therapy. As at 31 December 2013, sales of Salofalk covered over 2,000 hospitals
throughout China. The sales of Salofalk in the past five years met the requirement of the exclusive rights
for promotion and sales of Salofalk in China that the Group gained in September 2008, according to the
agreement, the exclusive rights were automatically renewed for another five years during the Reporting
Period.
Bioflor (Saccharomyces Boulardii)
Bioflor, manufactured by Biocodex of France, is a probiotics agent used by both adults and children to treat
diarrhea and diarrhea symptoms caused by the disturbance of intestinal flora. During the Reporting Period,
Bioflor achieved sales of US$15.0 million, an increase of 63.1% when compared to last year, accounting for
4.1% of the Group’s turnover. As Bioflor was introduced in 2010, the Group’s focus during the Reporting
Period was to continuously expand its usage as well as to improve doctors’ favorable understanding of the
product. During the Reporting Period, the Group continued to intensify the application of the product to adult
gastroenterology on the basis of pediatrics. As at 31 December 2013, sales of the product covered over 1,600
hospitals throughout China.
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Annual Report 2013
Augentropfen Stulln Mono Eye-drops (Escuilin and Digitalisglycosides Eye-drops)
Augentropfen Stulln Mono Eye-drops, manufactured by Pharma Stulln GmbH of Germany, is used to treat
age-related macula degeneration and all forms of ocular asthenopia. Due to the insufficient supply from the
manufacturer, during the Reporting Period, Augentropfen Stulln Mono Eye-drops recorded sales of US$13.1
million, a decline of 1.2% when compared to last year, accounting for 3.6% of the Group’s turnover. Under
the circumstance of the supply shortage, the Group mainly concentrated on protecting and maintaining the
stability of the current market. Meanwhile, the stepping up of promotional efforts on the usage of the product
in the treatment of ocular asthenopia paved the way for growth of the product after supply was resumed. As
at 31 December 2013, sales of Augentropfen Stulln Mono Eye-drops covered over 4,300 hospitals throughout
China.
Augentropfen Stulln Mono Eye-drops is one of the main products of the Group under the Direct Network.
During the Reporting Period, the Group communicated with the manufacturer of the product a number of
times to discuss the problem of product supply, and actively identified measures to achieve stable supply of
the product. Due to the start-up of the manufacturer’s new production lines, the supply of the product took
a comparatively obvious turn for the better in the fourth quarter of 2013 and has remained quite stable since
then.
(ii)
Products under the Agency Network
Main Products
ShaDuoLiKa
(YanHuNing Injection)
YiNuoShu
(Ambroxol Hydrochloride for Injection)
XiDaKang
(Protein Hydrolysate Oral Solution/Oral Protein
Hydrolysate)
Yin Lian Qing Gan Ke Li
As a Percentage of the Group’s Revenue (%)
14.4
8.1
1.1
0.1
ShaDuoLiKa (YanHuNing Injection)
ShaDuoLiKa, developed and manufactured by Chongqing Yaoyou Pharmaceutical Co., Ltd., is a common
injection of anti-infective TCM used in pediatrics, respiratory and emergency departments. During the
Reporting Period, ShaDuoLiKa recorded sales of US$52.3 million, accounting for 14.4% of the Group’s
turnover. The refurbishment of the manufacturer of the product in accordance with the latest Chinese GMP
requirements in the first half of 2013 resulted in an influence on the supply of the drug. Although supply
recovered gradually in the second half of the year, the sales volume of the product nevertheless recorded
a slight decline by 4.0% compared to last year. In order to sustain market equilibrium during the supply
shortage, the Group adopted a marketing strategy geared against production to relocate ShaDuoLiKa in the
market in a rational manner in the first half of 2013. With supply recovering gradually in the second half of
the year, the Group’s priority for the product was to resume and redevelop the market and to engage in joint
efforts with the manufacturer and agencies to enhance market education and risk monitoring concerning
security in the clinical application of the product.
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Annual Report 2013
YiNuoShu (Ambroxol Hydrochloride for Injection)
The Group owns the controlling rights for YiNuoShu and commissions Kangzhe (Hunan) Medical Company
Limited and TIPR Pharmaceutical Responsible Co., Ltd to manufacture the product. YiNuoShu is an
expectorant product used for respiratory diseases. During the Reporting Period, YiNuoShu retained steady
growth amid fierce market competition and recorded sales of US$29.5 million, accounting for 8.1% of the
Group’s turnover. During the Reporting Period, the Group proactively identified appropriate agencies for
YiNuoShu in the untapped markets, and along with the opportunity of expansion of the Essential Drug List in
various regions, promoted the development of the product in the rural market.
XiDaKang (Protein Hydrolysate Oral Solution/Oral Protein Hydrolysate)
XiDaKang, the only Protein Hydrolysate enteral nutrition agent to have received approval in China, is sold in
the form of an oral solution and granules. During the Reporting Period, XiDaKang recorded sales of US$4.0
million, accounting for 1.1% of the Group’s turnover. XiDaKang is one of the important products under the
Agency Network of the Group. During the Reporting Period, in addition to a series of strategic arrangements
for its production, the Group also actively took the initiative to promote the market development of the
product, which further advanced clinical scientific research on XiDaKang, and also hosted a number of
specific training sessions based on product characteristics so as to continuously enhance the agencies’
academic understanding of the product and to improve the effectiveness of promotion.
Yin Lian Qing Gan Ke Li
Yin Lian Qing Gan Ke Li, manufactured by Beijing Yadong Biological Pharmaceutical Co., Ltd., is an
exclusive TCM product that has been awarded a National New Drug Certificate, and is mainly used to treat
various acute and chronic forms of hepatitis, alcoholic liver, fatty liver and hypertension. Since the market
foundation of Yin Lian Qing Gan Ke Li was comparatively weak, the Group was mainly committed to
expanding the market coverage of the product during the Reporting Period, consolidating its existing market
foundation while proactively identifying suitable agents for the product and meeting its academic needs
for clinical promotion with certain academic support. Yin Lian Qing Gan Ke Li recorded sales of US$0.3
million, accounting for 0.1% of the Group’s turnover.
(iii)
Other Products
Apart from the products mentioned above, other products sold by the Group such as Cystistat, GanFuLe,
Exacin, KunNing Oral Solution, Xiang Fu Yi Xue Kou Fu Ye etc. recorded total sales amounting to
approximately US$21.4 million, accounting for approximately 6.0% of the Group’s turnover during the
Reporting Period.
- 13 -
Annual Report 2013
(iv)
In-house Research Pharmaceutical Product
Tyroserleutide (CMS024), a National Class One New Drug researched and developed by the Group and
with independent intellectual property rights, is used to treat primary liver cancer. The phase III clinical
trial of Tyroserleutide, entitled “A Randomized, Double Blinded, Placebo Controlled, Multicenter Phase III
Study to Evaluate the Safety and Efficacy of Tyroserleutide for Injection in the Patients with Hepatocellular
Carcinoma”, officially commenced in 2011, enrolled all 300 subjects at the end of October in 2013, and
convened the blind data review of the clinical trial in Shanghai, China to unblind the data and conduct
preliminary statistical analysis on 28 February in 2014. In the Full Analysis Set (FAS), the treatment group
and placebo group of the phase III clinical trial of Tyroserleutide failed to meet the primary and secondary
endpoints (RFS and OS) with statistical significance. Therefore, the clinical trial failed to achieve its aim to
register for selling the drug in the Chinese market. When considering the analysis of the two subgroups with
and without tumor thrombosis in the hepatic portal vein branches of the clinical trial, tumor thrombosis in
the hepatic portal vein branches seriously interfered with the primary efficacy evaluation. The subgroup with
tumor thrombosis in the hepatic portal vein branches involving patients in serious condition, faster recurrence
and shorter drug exposure time greatly affected the primary efficacy evaluation of the clinical trial, while
the subgroup with no tumor thrombosis in the hepatic portal vein branches demonstrated a favorable trend
for treatment group compared to placebo group on RFS and OS due to patients in better condition, lower
recurrence and longer drug exposure time; in particular the OS approached statistical significance. Combined
with observations from previous clinical trials, the Group believes that further investigations focusing on
the patient population with better condition (such as, subjects with no tumor thrombosis in the hepatic portal
vein branches) with OS as the primary endpoint is highly recommended. Consequently, the Group discussed
and negotiated with Kangzhe R&D to continue conducting a follow-up clinical trial of Tyroserleutide and
Kangzhe R&D will continue sponsoring the clinical trial. The Group will propose the protocol design for the
next stage of Tyroserleutide clinical development after further analyzing and reseaching the data from the
clinical trial.
Meanwhile, during the Reporting Period, the Group basically completed main construction work of the
manufacturing facilities for Tyroserleutide, located in the new district of Pingshan in Shenzhen, China and
is carrying forward the final construction and GMP certification for the production base. The Group will
actively identify drugs suitable for production at the base so as to make full use of its production capacity.
- 14 -
Annual Report 2013
(v)
Products under Registration
The Group had nine products undergoing the application process for import drug registration during the
Reporting Period which will contribute to the Group’s revenue after they are officially issued Imported Drug
Licenses (IDL) by the CFDA. Key information of these products is listed below:
Products
Indications
Manufacturers
Budenofalk
Mainly used to treat Inflammatory Bowel Disease
(IBD) and Crohn’s Disease
Dr. Falk Pharma GmbH
(Germany)
L-lysine Aescinat
Mainly used to treat symptoms of swelling and pain
Thiotriazolin
Mainly used to treat chronic hepatitis arising from
various causes, liver failure, ischemic heart disease,
and myocardial infarction, etc.
Maltofer®
Mainly used to treat iron deficiency without anemia
(“ID”) and iron deficiency with anemia (“IDA”)
For the treatment and prevention of recurrent urinary
tract infections and to stimulate the immune system
Uro-Vaxom®
and the body’s natural defense against urinary
pathogens
Mainly used for the treatment of weakness and
Stimol®
(Citrulline Malate
fatigue induced by various diseases and long-term
Effervescence Powder) fatigue and over-exertion, etc.
Ze 339
For the treatment of allergic rhinitis
Ze 450
Ze 440
For the treatment of menopausal discomforts
For the treatment of pre-menstrual syndrome and
menstrual cycle disorder
Arterim Corporation
(Ukraine)
Vifor Pharma
(Switzerland)
Biocodex
(France)
Max Zeller Söhne AG
(Switzerland)
Network Expansion
During the Reporting Period, the Group continued to expand its marketing and promotion network,
in addition to continuously expanding the scale of the network; it intensified the breadth and depth of
network coverage. With the efforts of the Group, as at 31 December 2013, the Group’s Direct Network had
around 1,700 professional marketing, promotion and sales representatives and covered more than 14,000
hospitals across the country while the Agency Network had signed over 1,100 independent third-party sales
representatives or agents and covered over 7,000 hospitals across the country. Furthermore, during the
Reporting Period, the Group continued to promote the layout and market development of the marketing and
promotion network in the rural market and preliminarily obtained achievements.
- 15 -
Annual Report 2013
During the Reporting Period, the priority of the Group’s Direct Network was to get through the run-in period
between the adjusted organizational structure and the market as early as possible to fully utilize the advantage
of the new network. In order to ensure sufficient supply of talents that meet the requirements of the Direct
Network, during the Reporting Period, the Group executed a program in which new employees recruited in
the second half of 2012 were distributed to various regions for internships and training sessions, and were
arranged for appropriate positions on the basis of their performance. Meanwhile, a new round of campus
recruitment was initiated in September 2013, and the Group will continuously via “Internship Program” and
“Professional Talent Development Program” cultivate professional quality and vocational proficiency for
new employees. In addition, the Group’s headquarters enforced the supervision and feedback of the Direct
Network under a new organizational structure in which business management responsibilities moved to
the front lines along while putting in place a mechanism in which regional sales management reported to
the headquarters in Shenzhen on a regular basis, consolidating the function of an information management
system and thereby maintaining the flexibility of regional business management while reinforcing supervision
from headquarters.
In terms of the development of the Agency Network, the Group emphasized the seeking of more premium
agencies for its main products and products newly signed in recent years during the Reporting Period,
and made use of an information management system to administer and track each key link during the
sales process of agencies expecting to continuously elevate the managerial level of the Agency Network.
Furthermore, agency training was also the priority of the Group during the Reporting Period. The Group
continued to arrange a number of specific training sessions for agencies, especially on several products with
certain academic demand, and the Group expected to fully foster and perform the agencies’ capabilities in the
clinical promotion of products via these training sessions.
In addition, to accommodate the Group’s needs for the workplace in terms of its continuous business
development and the growing number of employees, the Group through its wholly-owned subsidiary signed
a temporary agreement for property acquisition with Shenzhen Da ShaHe Innovation Corridor Construction
Investment and Management Company Limited* (the “Vendor”) in August 2011. The Vendor will set up
the Innovation Building* located in Ma Jialong Industrial Zone, Nanshan District, Shenzhen, China and
with block parcel number 04-05-17 and sell it to the enterprise for office premises as headquarters in line
with the requirements of “Interim Procedures for Corporate Headquarters Premises in Nanshan District”*
and as approved by the Leading Group of Corporation Head Offices of Nnanshan District. According to
the agreement, the Vendor needed to meet the requirement of completion acceptance of the property within
24 months starting from September 2011 and to summit the information relating to completion acceptance.
The Vendor has to transfer the property to the Group within 30 working days after obtaining the project
acceptance record. As at the end of the Reporting Period, the Group had not received notification on the
completion of the property and the Group will announce any relevant progress in a timely manner.
* For Identification Only
- 16 -
Annual Report 2013
Outlook and Future Development
The Group considers the introduction and promotion of products and the expansion of its marketing and
promotion network to be the two core strategies and also the main direction of the Group’s sustainable
development in the future.
The Group will continue to proceed with negotiations on new product introductions, single out premium
prescription drugs with potential in the China market by profession, and enrich the product portfolio of
the Group. The Group will adhere to prioritizing the effective control of product rights during product
introduction, which is recognized as a strategic consideration for the Group’s long-term development.
For the development of existing products, the Group will combine the characteristics of each product and its
market situation to explore the rapid growth model of existing products. In addition to constantly enhancing
hospital coverage and department penetration of products, the Group will also discuss and create new
growth points during the next stage of development. Meanwhile, the Group will continue maintain favorable
communications with suppliers and endeavor to guarantee the stability of the market rights and supply of the
Group’s existing products. In addition, the successful granting of market approval by the CFDA for products
in the registration process will make a contribution to the growth of the Group in the near future.
In the area of network development, for the Direct Network, the Group will continue to utilize campus
recruitment to continue to provide outstanding talents for the expansion and refinement of the network and
strengthen professional training to gradually forge a talent network with profession and high level of quality
for the Group’s development. Meanwhile, the Group will go on to improve the management and regulation
of the Direct Network, establish a more justified distribution and incentive system, and motivate the mature
and steady operation of the Direct Network. For the Agency Network, the Group will continue to commit
itself to expanding the scale of the network, select agencies that fit with product development, optimize
the operational pattern of agencies as well as further consolidate the management and supervision of the
network. The Group will also continue to provide agencies with specific training sessions and give full play
to agencies’ initiative in product promotion.
The Group will also continue to make efforts to intensify internal management and supervision to secure its
business operations and financial management in compliance with the relevant laws and regulations and to
continuously improve its risk prevention mechanism as it expects to achieve greater progress.
- 17 -
Annual Report 2013
Financial Review
In reading the following discussion and analysis, please also refer to the audited consolidated financial
statements and notes to the financial statements as shown in the Annual Report.
The Group prepared the consolidated financial statements in accordance with the International Financial
Reporting Standards. The Group’s financial performance is summarized as follows:
Turnover
Turnover represents the revenue we generated from the sale of in-licensed products and our in-house
manufactured pharmaceutical products.
2013
2012
US$’000
Weight
US$’000
Weight
Deanxit
101,485
27.9%
88,079
31.2%
Ursofalk
73,108
20.1%
60,750
21.6%
ShaDuoLiKa
52,345
14.4%
22,520
8.0%
XinHuoSu
36,641
10.1%
26,820
9.5%
YiNuoShu
29,497
8.1%
26,150
9.3%
Salofalk
16,348
4.5%
11,439
4.1%
Bioflor
Augentropfen Stulln
Mono eye-drops
GanFuLe
15,031
4.1%
9,214
3.3%
13,126
5,844
3.6%
1.6%
13,280
5,018
4.7%
1.8%
Exacin
4,044
1.1%
3,684
1.3%
XiDaKang
3,956
1.1%
3,326
1.2%
Cystistat
1,038
0.3%
1,041
0.4%
326
0.1%
81
0.0%
10,467
3.0%
10,464
3.6%
363,256
100.0%
281,866
100.0%
Yin Lian Qing Gan Ke Li
Others
Turnover increased by 28.9% from US$281.9 million for the year ended 31 December 2012 to US$363.3
million for the year ended 31 December 2013, mainly due to an increase in sales volume; the selling price of
products remained stable, except that the price of ShaDuoLiKa sold to the agencies was increased by 138.2%
during the Reporting Period.
Gross Profit and Gross Profit Margin
Gross profit increased by 19.5% from US$165.8 million for the year ended 31 December 2012 to US$198.1
million for the year ended 31 December 2013, primarily reflecting growth in turnover. Excluding the effect of
the factor that the price of ShaDuoLiKa selling to the agencies was increased, gross profit margin increased
to 59.5% for the year ended 31 December 2013 from 58.8% for the year ended 31 December 2012, mainly
due to an increase in the weighting of the products with higher gross profit margin.
- 18 -
Annual Report 2013
Selling Expenses and Selling Expenses as a Percentage of Turnover
Selling expenses increased by 31.3% from US$57.5 million for the year ended 31 December 2012 to
US$75.5 million for the year ended 31 December 2013, primarily reflecting an increase in turnover and the
number of sales staff of the Group, and the continuous extension & deepening of the Direct Network. Also
selling expenses as a percentage of turnover increased by 0.4 percentage points from 20.4% for the year
ended 31 December 2012 to 20.8% for the year ended 31 December 2013.
Administrative Expenses and Administrative Expenses as a Percentage of Turnover
Administrative expenses increased by 24.9% from US$18.8 million for the year ended 31 December 2012 to
US$23.5 million for the year ended 31 December 2013, mainly due to an increase in maintenance expenses,
and a one-off auction fee arising from acquisition of Kangzhe Lengshuijiang and its post-acquisition
expenses. Administrative expenses as a percentage of turnover decreased by 0.2 percentage points from 6.7%
for the year ended 31 December 2012 to 6.5% for the year ended 31 December 2013 as the Group benefited
from economies of scale.
Other Gains and Losses
Other gains and losses increased by 105.5% from US$7.0 million for the year ended 31 December 2012 to
US$14.3 million for the year ended 31 December 2013, mainly due to an increase in exchange gain arising
from the appreciation of Renminbi, and interest income.
Finance Costs
Finance costs increased by 35.6% from US$2.0 million for the year ended 31 December 2012 to US$2.7
million for the year ended 31 December 2013, mainly due to an increase in the use of bank borrowings.
Profit for the Year
Profit for the year increased by 20.6% from US$85.1 million for the year ended 31 December 2012 to
US$102.7 million for the year ended 31 December 2013, due to the continuous and stable growth in sales.
Inventories
Inventories increased by 76.9% from US$15.5 million as at 31 December 2012 to US$27.4 million as at
31 December 2013,mainly reflecting the increase in line with the growth in turnover. Average inventory
turnover days decreased from 57 days for the year ended 31 December 2012 to 47 days for the year ended 31
December 2013.
Trade Receivables
Trade receivables increased by 23.8% from US$50.3 million as at 31 December 2012 to US$62.3 million as
at 31 December 2013, primarily reflecting the growth in sales. At the same time, as a result of strengthened
management of account receivables, average trade receivables turnover days decreased from 59 days for the
year ended 31 December 2012 to 57 days for the year ended 31 December 2013.
- 19 -
Annual Report 2013
Trade Payables
Trade payables increased by 15.4% from US$9.6 million as at 31 December 2012 to US$11.1 million as at 31
December 2013, mainly reflecting the increase of inventories. Average trade payables turnover days decreased
from 32 days for the year ended 31 December 2012 to 23 days for the year ended 31 December 2013.
Liquidity and Financial Resources
The following table is a summary of our consolidated statements of cash flows:
For the year ended 31 December
2013
2012
US$’000
US$’000
54,082
69,790
Net cash used in investing activities
(28,071)
(52,977)
Net cash used in financing activities
(55,973)
(8,307)
Net (decrease) increase in cash and cash equivalent
(29,962)
8,506
Cash and cash equivalent at beginning of the year
107,162
97,906
Effect of foreign exchange rate changes
2,831
750
Cash and cash equivalent at end of the year
80,031
107,162
Net cash from operating activities
Net cash from operating activities
The Group’s net cash generated from operating activities was US$54.1 million for the year ended 31
December 2013 compared with US$69.8 million for the year ended 31 December 2012, a decrease of 22.5%
mainly due to the increase in payment and prepayment for purchase of drugs.
Net cash used in investing activities
For the year ended 31 December 2013, the Group’s net cash used in investing activities was US$28.1 million
compared with US$53.0 million for the year ended 31 December 2012, a decrease of 47.0% mainly due to a
decrease in the placement of pledged bank deposit.
Net cash used in financing activities
For the year ended 31 December 2013, the Group’s net cash used in financing activities was US$56.0 million
compared with US$8.3 million for the year ended 31 December 2012, an increase of 573.8% mainly due
to an increase in dividend paid, and no corresponding borrowings to be made with some deposits pledged
during the current year.
- 20 -
Annual Report 2013
Net Current Assets
As at 31 December
2013
2012
US$’000
US$’000
Inventories
27,401
15,488
Trade receivables
62,312
50,345
Other receivables
78,580
42,546
171
1,052
Pledged bank deposit
73,485
73,261
Bank balances and cash
80,031
107,162
321,980
289,854
Trade payables
11,130
9,642
Other payables
29,005
15,533
Secured bank borrowings
51,521
64,845
940
812
4,278
2,605
96,874
93,437
225,106
196,417
Current Assets
Tax recoverable
Current Liabilities
Deferred consideration payables
Tax payable
Net current assets
Capital Expenditures
The following table shows our capital expenditure:
For the year ended 31 December
2013
2012
US$’000
US$’000
Purchase of available-for-sale investments
-
13,635
Purchase of intangible assets
-
5,244
22,059
5,752
1,805
-
23,864
24,631
Purchase of property, plant and equipment
Purchase of land use right
- 21 -
Annual Report 2013
Debts
The following table shows the Group’s debts:
As at 31 December
Interest bearing secured bank borrowings
2013
2012
US$’000
US$’000
51,521
64,845
The Group’s gearing ratio, calculated as secured bank borrowings divided by total assets, decreased to 8.2%
as at 31 December 2013 from 11.7% as at 31 December 2012, mainly reflecting a decrease in secured bank
borrowings.
Market Risks
We are exposed to various types of market risks, including interest rate risks, foreign exchange risks, policy
risks and inflation risks in the normal course of business. These risks are set out in note 30 to the financial
statements.
Dividend
For the year ended 31 December 2013, the Group paid an interim dividend for 2013 and a final dividend
for 2012 of US$20.2 million and US$18.7 million, respectively. For the year ended 31 December 2012,
the Group paid an interim for 2012 and a final dividend for 2011 of US$15.6 million and US$12.9 million,
respectively.
- 22 -
Annual Report 2013
Director and Senior Management
Executive Director
Mr. Lam Kong, aged 49, is the Chairman, Chief Executive Officer (“CEO”) and the President of the
Group and was appointed as an executive Director, on 18 December 2006. He acquired Shenzhen Kangzhe
Pharmaceutical Co., Ltd. (“Shenzhen Kangzhe”) through his company over 18 years ago, building the
business from a small company engaged in trading of pharmaceutical products to a leading pharmaceutical
service company providing marketing, promotion and sale services. Mr. Lam is responsible for the
formulation, implementation and management of the Group’s development and growth strategy and the
management of the overall operation of the Group. Mr. Lam possesses clinical experience and has over 18
years of experience in marketing, promotion, sale and other value-added services for pharmaceutical products
in China. He received his bachelor’s degree in medicine from Zhanjiang Medical College in 1986, the name
of which was changed to Guangdong Medical College in 1992. Mr. Lam is a member of the Nomination
Committee of the Company.
Mr. Lam is a controlling shareholder of the Company and is interested or deemed to be interested in the
Shares and underlying Shares of the Company for the purpose of Part XV of the Securities and Futures
Ordinance (“SFO”), the details of which are set out on pages 30 of this annual report.
Mr. Chen Hongbing, aged 47, is the Chief Operating Officer and the Vice-president of the Group and was
appointed as an executive Director on 18 December 2006. He joined the Group in 1995 and has remained
with the Group since then. Mr. Chen is responsible for the operation of the Group’s marketing, promotion and
sale business and office administration. He had acquired about four years’ clinical experience as a resident
doctor with Nanjing Gulou Hospital from 1990 to 1994 prior to joining the Group in 1995. He graduated
from Nanjing Medical College with a bachelor’s degree in clinical medicine in 1990.
Mr. Chen is interested or deemed to be interested in the Shares and underlying Shares of the Company for the
purpose of Part XV of SFO, the details of which are set out on pages 30 of this annual report.
Ms. Chen Yanling, aged 43, is the Chief Financial Officer and the Vice-president of the Group and was
appointed as an executive Director on 18 December 2006. She joined the Group in 1995 and has remained
with the Group since then. Ms. Chen is responsible for the Group’s financial affairs, accountant, financing,
taxation, audit, internal control and investor relations affairs. She received her accountancy qualification
in 1997 from the Ministry of Personnel of the People’s Republic of China and received EMBA from the
International East-west University in 1999.
Ms. Chen is interested or deemed to be interested in the Shares and underlying Shares of the Company for
the purpose of Part XV of SFO, the details of which are set out on pages 30 of this annual report.
- 23 -
Annual Report 2013
Mr. Hui Ki Fat, aged 72, was appointed as an executive Director on 26 April 2007. Mr. Hui has also been a
director of the Group’s subsidiary since 1999. He was a director and general manager of Jebsen & Company
Ltd. in Tianjin, China for which he worked from 1968 to 1981 and from 1983 to 1998.
Mr. Hui is interested or deemed to be interested in the Shares and underlying Shares of the Company for the
purpose of Part XV of SFO, the details of which are set out on pages 30 of this annual report.
Ms. Sa Manlin, aged 54, was appointed as an executive Director on 11 December 2012. Ms. Sa joined the
Group in 1995 and has remained with the Group since then. Ms. Sa is responsible for the products’ marketing
and promotion matters of Shenzhen Kangzhe. She had acquired about ten years’ clinical experience prior
to joining the Group in 1995. Ms. Sa received a bachelor’s degree in medicine from Shanghai University
of Traditional Chinese Medicine in 1984 and a master’s degree in Business Administration from the Asia
International Open University (Macau) in 2003 which was officially renamed as City University of Macau in
2011.
Ms. Sa is interested or deemed to be interested in the Shares and underlying Shares of the Company for the
purpose of Part XV of SFO, the details of which are set out on pages 30 of this annual report.
Independent Non-executive Directors
Mr. Cheung Kam Shing, Terry, aged 51, was appointed as an independent non-executive Director of
the Company on 18 August 2010. Mr. Cheung has more than 29 years’ experience in securities broking,
investment banking, fund management, private equity and other financial areas. He is currently the Chief
Operating Officer of Greater China Professional Services Limited, being a professional services company
providing corporate governance, asset valuation, and other corporate advisory services, since July 2010.
The companies he worked for after graduating from the University of Hong Kong in 1984 included Sanyo
Securities (Asia) Limited, Fidelity International Investment Management Limited, Kerry Securities Limited,
Sassoon Securities Limited, and Core-Pacific Yamaichi International (HK) Limited from 1984 to 2000.
Mr. Cheung served as Managing Director at Culturecom Holdings Limited (a company listed on the Stock
Exchange with stock code 0343) from 2000 to 2005. He later served as Managing Director of Nouveau
Investment Group Limited from 2005 to mid 2010. Mr. Cheung received his bachelor’s degree in social
sciences from the University of Hong Kong in 1984 and his master’s degree in science (financial economics)
from the University of London in 1995. Mr. Cheung is the chairman of the Nomination Committee, a
member of the Audit Committee and a member of the Remuneration Committee of the Company.
- 24 -
Annual Report 2013
Mr. Huang Ming, aged 50, was appointed as an independent non-executive Director of the Company on
9 October 2013. Mr. Huang was an Assistant Professor and Associate Professor of Finance at Stanford
University, Graduate School of Business from 1998 to 2002, and was the Associate Dean and Visiting
Professor of Finance and the Professor of Finance at Cheung Kong Graduate School of Business from 2004
to 2005 and from 2008 to 2010 respectively, and was the Head of School of Finance of Shanghai University
of Finance and Economics from 2006 to April 2009. He has been a Professor of Finance at the Johnson
Graduate School of Management at Cornell University since July 2005, and has been a Professor of Finance
at China Europe International Business School since July 2010. Mr. Huang has been a non-executive Director
of the Annuity Fund Management Board of China National Petroleum Corporation since 2007. He has been a
non-executive Director of Yingli Green Energy Holding Company Limited (stock code: YGE) and Qihoo 360
Technology Co. Ltd. (stock code: QIHU), companies listed on the New York Stock Exchange, since 2008
and 2011 respectively, and he has also been an independent non-executive Director of Fantasia Holdings
Group Co., Ltd. (stock code: 1777), a company listed on the Stock Exchange, since 2009. Mr. Huang is
currently a non-executive Director of 360buy Group, Guosen Securities Co. Ltd. and Tebon Securities
Co. Ltd. Mr. Huang graduated from Peking University in 1985 majoring in physics, and then obtained his
doctor’s degree in physics and finance from Cornell University and Stanford University respectively. Mr.
Huang is the chairman of the Remuneration Committee, a member of the Audit Committee and a member of
the Nomination Committee of the Company.
Mr. Wu Chi Keung, aged 57, was appointed as an independent non-executive Director on 25 June 2010.
Mr. Wu has more than 30 years of experience in financial audit and specializes in providing auditing and
assurance services, financial due diligence reviews, support services for merger and acquisitions, corporate
restructuring and fund raising engagements. Mr. Wu was a partner of Deloitte Touche Tohmatsu until he
retired in December 2008. Mr. Wu is currently the managing Director of a family-owned private company
engaging in property and other investment activities. He is also an independent non-executive Director of
Jinchuan Group International Resources Co., Ltd (stock code: 2362), GreaterChina Professional Services
Limited (stock code: 8193), Zhong Fa Zhan Holdings Limited (stock code: 475), China Renji Medical Group
Limited (stock code: 648), Huabao International Holdings Ltd. (stock code: 336) and YuanShengTai Dairy
Farm Ltd. (stock code: 1431), all the shares of which are listed on the Stock Exchange. Mr. Wu was also an
independent non-executive Director of JF Household Furnishings Limited (stock code: 776) from 16 August
2011 to 5 October 2012. Mr. Wu is an associate of Hong Kong Institute of Certified Public Accountants and
a fellow of Association of Chartered Certified Accountants in the United Kingdom. Mr. Wu graduated from
Hong Kong Polytechnic (now known as Hong Kong Polytechnic University) in 1980 with a high diploma
in accountancy. Mr. Wu is the chairman of the Audit Committee, a member of the Remuneration Committee
and a member of the Nomination Committee of the Company.
- 25 -
Annual Report 2013
Senior Management
Dr. Wong Wai Ming, aged 53, has been the Chief Technical Officer of the Group since 2010. He first
joined the Group in 2000 and then became the Chief R&D Officer in 2007. He is responsible for dealing
with technical issues in introducing products and providing technical advice to the Group for selecting
pharmaceutical products. Prior to this, Dr. Wong worked as manager of China pharma department for Jebsen
Co. Ltd. He studied bio-chemistry and received his bachelor’s degree in science and PhD from the University
of Hong Kong in 1983 and 1993, respectively.
Company Secretary
Ms. Zhang Lingyan, aged 42, joined the Group in 2000 and currently holds the positions of Company
Secretary, Director of Legal and Investment Affairs of the Group and Director of the CEO’s office. Ms.
Zhang is primarily responsible for overseeing the legal and investment affairs of the Group, including
compliance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong
Limited (“Listing Rules”). Ms. Zhang obtained a bachelor’s degree in management majored in ideological
and political education and a master’s degree in jurisprudence from Nanjing Normal University in 1993 and
2000, respectively. Ms. Zhang has extensive experience in corporate governance and compliance matters.
During the Reporting Period, Ms. Zhang had received the professional training for no less than 15 hours to
promote her skill and knowledge.
- 26 -
Annual Report 2013
Directors’ Report
The board of Directors of the Company (the “Board”) is pleased to present the Directors’ report and audited
consolidated financial statements of the Group for the year ended 31 December 2013.
Principal Activities
The Company is a holding company, the subsidiaries’ principal activities are set out in note 37 to the financial
statements.
Results
The results of the Group for the year ended 31 December 2013 are set out in the consolidated statement of
profit or loss and other comprehensive income in page 44.
Reserves
Movements in reserves for the year ended 31 December 2013 are set out in the consolidated statement of
changes in equity in page 47 and note 28 to the financial statements.
Distributable Reserves
As at 31 December 2013, the Company had distributable reserves of US$324.2 million available for
distribution to our shareholders.
Property, Plant and Equipment
Details of changes in property, plant and equipment of the Group are set out in note 14 to the financial
statements.
Share Capital
Movements in the share capital of the Company are set out in note 27 to the financial statements.
Final Dividend
The Board of Directors is pleased to recommend a final dividend of US0.863 cent (equivalent to HK$0.067)
per Share for the year ended 31 December 2013 to shareholders whose names appear on the register of
members of the Company on Monday, 12 May 2014. The register of members of the Company will be closed
from Thursday, 8 May 2014 to Monday, 12 May 2014 (both days inclusive). The final dividend will be paid
to shareholders on Monday, 19 May 2014 after the shareholders’ approval at the AGM dated on Wednesday,
30 April 2014.
Pre-emptive Rights
There are no provisions for pre-emptive rights under the Company’s Articles of Association (the “Articles of
Association”) or the laws of the Cayman Islands which oblige the Company to offer new shares on a pro-rata
basis to the existing shareholders.
- 27 -
Annual Report 2013
Purchase, Sale or Redemption of the Company’s Listed Securities
The Company has not purchased, sold or redeemed any of its listed securities during the year ended 31
December 2013.
Directors
The Directors of the Company during the year and up to the date of this Report were:
Executive Directors
Mr. LAM Kong (Chairman and CEO)
Mr. CHEN Hongbing (Chief Operating Officer)
Ms. CHEN Yanling (Chief Financial Officer)
Mr. HUI Ki Fat
Ms. SA Manlin
Independent Non-Executive Directors
Mr. CHEUNG Kam Shing, Terry
Dr. PENG Huaizheng (resigned on 9 October 2013)
Mr. HUANG Ming (appointed on 9 October 2013)
Mr. WU Chi Keung
Pursuant to Article 16.2 of the Articles of Association, any director appointed by the Board to fill a causal
vacancy or as an addition to the Board shall hold office until the next following AGM of the Company and
shall be eligible for re-election at that meeting. Mr. Huang Ming was appointed by the Board on 9 October
2013 as an independent non-executive Director. Accordingly, Mr. Huang shall retire from his office at the
AGM and, being eligible, will offer himself for re-election at the AGM.
Pursuant to Article 16.18 of the Articles of Association, at every AGM of the Company, one-third of the
Directors for the time being (or, if their number is not three or a multiple of three, then the number nearest
to, but not less than, one-third) shall retire from office by rotation provided that every Director (including
those appointed for a specific term) shall be subject to retirement by rotation at least once every three years.
Any Director appointed pursuant to Article 16.2 or Article 16.3 shall not be taken into account in determining
which Directors are to retire by rotation. A retiring Director shall be eligible for re-election. Accordingly, Mr.
Lam Kong, Mr. Chen Hongbing and Mr. Wu Chi Keung will retire from their offices at the AGM and, being
eligible, offer themselves for re-election at the AGM.
At the AGM, separate ordinary resolutions will be proposed for each of the re-elections of Mr. Lam Kong,
Mr. Chen Hongbing, Mr. Wu Chi Keung and Mr. Huang Ming. Details of these retiring Directors are set out
in the circular issued on 28 March 2014.
Annual Confirmation of Independence
The Company has received from each independent non-executive Director an annual confirmation of his
independence, and the Company considers such Directors to be independent in accordance with each and
every guideline set out in rule 3.13 of the Listing Rules on the Stock Exchange.
- 28 -
Annual Report 2013
Biographical Details of the Directors and the Senior Management
The biographical details of the Directors and the senior management are set out on pages 23 to 26 of this
annual report.
Directors’ Service Contracts
Each of the Directors of the Company has respectively entered into an appointment letter with the Company,
and all the executive Directors and independent non-executive Directors were appointed for a three-year
and one-year term, respectively. Their appointments are subjected to retirement from office by rotation and
re-election at the AGM of the Company in accordance with the Articles of Association. Save as disclosed
above, none of the Directors has entered or intend to enter into any contract of service with the Company or
any of its subsidiaries which cannot be determinable by the employer within one year without payment of
compensation (except for statutory compensation).
Management Contracts
No contracts concerning the management and administration of the whole or any substantial part of the
business of the Company were entered into or existed during the Reporting Period.
Key Employee Benefit Scheme
Details of the key employee benefit scheme is set out in note 36 to the financial statements.
Directors’ interests in Contracts of Significance
During the Reporting Period, none of the Directors had a material interest, whether directly or indirectly, in
any contract of significance to the business of the Group to which the Company or any of its subsidiaries was
a party.
Directors’ Interests and Short Positions in Shares, Underlying Shares and Debentures
of the Company and Its Associated Corporations
As at 31 December 2013, the interests or short positions of the Directors in the shares, underlying shares
or debentures of the Company or any of its associated corporations (with the meaning of Part XV of SFO)
which were recorded in the register required to be kept by the Company pursuant to section 352 of the SFO,
or as otherwise notified to the Company and the Stock Exchange, pursuant to the Model Code for Securities
Transactions by Directors of Listed Issuers as set out in Appendix 10 of the Listing Rules were as follows:
- 29 -
Annual Report 2013
Name of Director
Mr. Lam Kong
Name of
Corporation
Nature of Interest
The Company
Interest in controlled
corporation
Interest in controlled
corporation
Interest in controlled
corporation
Mr. Chen Hongbing The Company
Beneficial owner
39,993,225 (L)
Interest in controlled
corporation
75,000,000 (L)
(Note 5)
9,361,162 (L)
(Note 6)
Beneficiary of a trust
Ms. Chen Yanling
The Company
Beneficial owner
7,835,250 (L)
Interest in controlled
corporation
3,750,000 (L)
(Note 7)
9,361,162 (L)
(Note 6)
Beneficiary of a trust
Mr. Hui Ki Fat
Ms. SA Manlin
The Company
The Company
Class of Shares
and Total Number
of Shares Held
(Note 1)
1,215,219,000 (L)
(Note 2)
2,396,500 (L)
(Note 3)
9,361,162 (L)
(Note 4)
Approximate
Percentage of
Interest in the
Company
50.32%
0.10%
0.39%
1.66%
3.11%
0.39%
0.32%
0.16%
0.39%
Beneficial owner
6,000,000 (L)
0.25%
Beneficial owner
6,712,237 (L)
0.28%
Family interest
Beneficiary of a trust
750,000 (L)
(Note 8)
9,361,162 (L)
(Note 6)
0.03%
0.39%
Notes:
1.
The letter “L” denotes long positions in the Shares. 2.
These Shares are held by Mr. Lam Kong through Treasure Sea Limited, a company wholly owned by him.
3.
These interests in respect of warrants are held by Mr. Lam Kong through Treasure Sea Limited, a company wholly owned by him.
4.
These Shares are held by Fully Profit Management (PTC) Limited, a company wholly owned by Mr. Lam Kong. Fully Profit
Management (PTC) Limited is the trustee of the Key Employee Benefit Trust, (a discretionary trust established by the
Company on 31 July 2009 for the Key Employee Benefits Scheme). Please refer to note 6 below for further details. 5.
These Shares are held by Mr. Chen Hongbing through Viewell Limited, a company wholly owned by him.
6.
These Shares are held by Fully Profit Management (PTC) Limited acting as the trustee of the Key Employee Benefit Trust. The
discretionary objects of the discretionary trust include Mr. Chen Hongbing, Ms. Chen Yanling and Ms. Sa Manlin and they are
deemed to be interested in these 9,361,162 Shares. The references to these 9,361,162 Shares in respect of which Mr. Lam Kong
is deemed to be interested in (as disclosed above) relate to the same block of Shares.
7.
These Shares are held by Ms. Chen Yanling through Great Creation Holdings Limited, a company wholly owned by her.
8.
These Shares are held by Mr. Zhang Ziqiang, the spouse of Ms. Sa Manlin, in respect of which Ms. Sa Manlin is deemed to be
interested in.
- 30 -
Annual Report 2013
Directors’ Right to Acquire Shares or Debentures
At no time during the year any right to acquire benefits by means of the acquisition of shares in or debentures
of the Company was granted to any Director or their respective spouse or minor children, or were any such
rights exercised by them; nor was the Company or any of its subsidiaries a party to any arrangement to enable
the Directors, their respective spouses or minor children to acquire such rights in any other body corporate.
Substantial Shareholders’ Interests and Short Positions in Shares, Underlying Shares
and Debentures of the Company and Its Associated Corporations
As at 31 December 2013, the Directors were not aware of any other person (other than the Directors of the
Company), who held interest and short positions in the shares or underlying shares or debentures of the
Company which would have to be disclosed to the Company and the Stock Exchange pursuant to Divisions 2
and 3 of Part XV of the SFO or were recorded in the register required to be kept by the Company pursuant to
section 336 of the SFO.
Connected Transactions
Details of connected transactions are set out in note 34 and note 36 to the financial statements.
Existing Share Options
The Company granted share options of 708,695 shares with an exercise price of GBP1.38 per share on 26
June 2007. These options were exercisable over five years which was vested on 26 June 2007 and has expired
on 25 June 2012. There was no outstanding share option at 31 December 2013 and no share option has been
granted during the Reporting Period.
Employees
As at 31 December 2013, the Group had 2,760 employees.
Directors’ and Management Emoluments
Particulars of directors’ emoluments and the five highest paid individuals of the Group are set out in note 8
and note 9 to the financial statements, respectively.
For the year ended 31 December 2013, emoluments of Chief Technical Officer Dr. Wong Wai Ming and
Company Secretary Ms. Zhang Lingyan was between HK$300,000 and HK$800,000 each.
Major Customers and Suppliers
For the year ended 31 December 2013, the percentage of sales to the Group’s five largest customers was
approximately 13.4% of the Group’s total sales, and sales to the top customer accounted for approximately
4.0% of the total sales.
- 31 -
Annual Report 2013
For the year ended 31 December 2013, the percentage of purchases from the Group’s five largest
suppliers was approximately 87.1% of the Group’s total purchases, and purchase from the top
supplier accounted for approximately 26.8% of the total purchases.
Except as disclosed in note 34 to the consolidated financial statements, none of the Group’s directors, the
contacts of the directors, the shareholders had an interest in supplier or customer.
Corporate Governance
A report for the corporate governance principles and practices adopted by the Company is set out on pages
34 to 41 of this annual report.
Sufficiency of Public Float
According to the publicly available information and as far as the Directors were aware of, as at the date of
this annual report, there was a sufficient public float of the Company’s issued shares as required under the
Listing Rules.
Non-competition and Indemnity Agreements
The Company entered into a deed of non-competition with Mr. Lam Kong and his wholly owned company
registered in the British Virgin Islands - Treasure Sea Limited (“Treasure Sea”) on 14 September 2010 (the
“Non-competition Deed”). Mr. Lam Kong and Treasure Sea jointly undertook not to carry on businesses that
are in competition with the Company’s businesses.
Mr. Lam Kong and Treasure Sea stated that they complied with the relevant clauses of the Non-competition
Deed, and did not engage in businesses that are in competition or may compete with the businesses of the
Company and any of its subsidiaries, and also did not directly or indirectly hold any business interest that is
in competition with the businesses of the Company and any of its subsidiaries during the Reporting Period.
The independent non-executive Directors have reviewed the compliance of the Non-competition Deed by Mr.
Lam Kong and Treasure Sea during the Reporting Period, and reviewed the relevant business information
provided by the Company. The independent non-executive Directors were of the opinion that Mr. Lam Kong
and Treasure Sea complied with the relevant terms of the Non-competition Deed during the Reporting Period
from and did not cause any competition with the Company. The Board of Directors operated and managed
the Company’s businesses independently in the interests of the Company and its shareholders as a whole.
Donations
The Company made no donation in any form for the year ended 31 December 2013.
- 32 -
Annual Report 2013
Compliance with the Corporate Governance Code
The Company has complied with the applicable principles and code provisions of the revised Corporate
Governance Code as set out in Appendix 14 to the Listing Rules (“CG Code”) from 1 January 2013 to 31
December 2013, except for a deviation from the Code provision A.2.1 in respect of the roles of chairman
of the board (“Chairman”) and Chief Executive Officer (“CEO”) which shall not be performed by the same
individual. The details of the Company’s compliance with the CG Code are set out on page 34 of this annual
report.
Competing Interests
None of the Directors or managements and their respective associates (as defined in the Listing Rules) has
an interest in a business which competes or may compete with the businesses of the Company or any of its
subsidiaries or has any other conflict of interest with the Company during the Reporting Period.
Audit Committee
The details of Audit Committee are set out in page 37 to 38 of the Corporate Governance Report of this
annual report.
Auditors
The Company has appointed Deloitte Touche Tohmatsu as auditors since the listing of the Company on the
Main Board of the HKEx on 28 September 2010. The financial statements in the Annual Report for the year
have been audited by Deloitte Touche Tohmatsu. A resolution will be submitted at the AGM of the Company
to re-appoint Deloitte Touche Tohmatsu as auditor of the Company.
- 33 -
Annual Report 2013
Corporate Governance Report
Corporate Governance Report
The Company is committed to upholding high standards of corporate governance and has adopted sound
governance and disclosure practices. The Company believes that maximizing long-term shareholder value by
increasing the Group’s accountability and transparency through continuous improving the level of corporate
governance.
Corporate Governance Practices
The Company has complied with the applicable principles and code provisions of the revised Corporate
Governance Code as set out in Appendix 14 to the Listing Rules (“CG Code”) from 1 January 2013 to 31
December 2013, except for a deviation from the Code provision A.2.1 in respect of the roles of Chairman and
CEO which shall not be performed by the same individual.
Mr. Lam Kong has been both the Chairman and CEO of the Company and his responsibilities are clearly
set out in writing and approved by the Board. Given the Group’s current stage of development, the Board
considers that vesting the roles of Chairman and CEO in the same person facilitates the execution of the
Group’s business strategies and maximizes effectiveness of its operations. The Board shall nevertheless
review the structure from time to time and shall consider any appropriate adjustments should new
circumstances arise.
Directors’ Securities Transactions
The Company adopted the Model Code for Securities Transactions by Directors of Listed Issuers (amended
from time to time) as set out in Appendix 10 to the Listing Rules (the “Model Code”) as the code of conduct
for Directors’ securities transactions. Having made specific inquiries of all Directors in relation to the
compliance with the Model Code for securities transactions by Directors, the Company confirmed that all
the Directors have complied with the relevant standards for securities transactions by directors set out in the
Model Code for the year ended 31 December 2013. The Model Code also applies to other specified senior
management of the Company.
Employees who are likely to be in possession of unpublished price-sensitive information about the Company
are also subject to compliance with guidelines on no less exacting terms than the Model Code. No incident of
non-compliance of the guidelines by such employees was noted by the Company in the Reporting Period.
Operation of the Board
In accordance with good corporate governance principles, the Board convened regular meetings in
accordance with, and complied strictly with the applicable laws, regulations and the Articles of Association in
the exercise of its authority, with an emphasis on protecting the interests of the Company and its shareholders
as a whole.
- 34 -
Annual Report 2013
The role and responsibilities of the Board broadly cover reviewing and approving corporate mission
and broad strategies; overseeing and evaluating the conduct of the Group’s businesses; identifying
principal risks and ensuring the implementation of appropriate measures and control systems
to manage these risks; and reviewing and approving important matters such as financial results,
investments and divestments and other material transactions.
The Company has established three committees, namely, the Audit Committee, Nomination Committee and
Remuneration Committee, which mainly comprise independent non-executive Directors and responsible
for overseeing particular aspects of the Group’s business, and to provide the Group with recommendations
for improvements. Please see below for the work scope of these committees. The Board has delegated
the responsibilities of the day-to-day management and operation of the Group’s businesses to the senior
management of the Company and its subsidiaries.
Composition of the Board
As at the date of this annual report, the Board consists of eight Directors, including five executive Directors,
namely Mr. Lam Kong, Mr. Chen Hongbing, Ms. Chen Yanling, Mr. Hui Ki Fat and Ms. Sa Manlin; three
independent non-executive Directors, namely Mr. Cheung Kam Shing, Terry, Mr. Huang Ming and Mr. Wu
Chi Keung. Biographical details of the Directors are set out on pages 23 to 26 of this annual report. Save
as disclosed in the section headed “Directors and Senior Managements’ Biographies” of this annual report,
none of the Directors has any financial, business, family or other material or relevant relationships among
members of the Board.
Appropriate insurance cover for the Directors’ and senior managements’ liabilities in respect of legal actions
against the Directors and senior managements of the Company arising out of corporate activities of the Group
has been arranged by the Company.
Board Attendances and Time Commitment
During the Reporting Period, the Company held five Board meetings and one AGM. The following is the
attendance record of the Directors at such meetings held during the Reporting Period.
Name
Mr. Lam Kong
Mr. Chen Hongbing
Ms. Chen Yanling
Mr. Hui Ki Fat
Ms. Sa Manlin
Mr. Cheung Kam Shing, Terry
Dr. Peng Huaizheng*
Mr. Huang Ming*
Mr. Wu Chi Keung
Title
Chairman and CEO
Chief Operating Officer
Chief Finance Officer
Executive Director
Executive Director*
Independent Non- Executive Director
Independent Non- Executive Director
Independent Non- Executive Director
Independent Non- Executive Director
*Notes:
1.
Dr. Peng Huaizheng resigned on 9 October 2013.
2.
Mr. Huang Ming was appointed on 9 October 2013.
- 35 -
Attendance Rate
Board Meeting
AGM
5/5
1/1
5/5
1/1
5/5
1/1
5/5
1/1
4/5
1/1
5/5
1/1
5/5
1/1
0/5
0/1
5/5
1/1
Annual Report 2013
Upon reviewing (i) the annual confirmation of the time commitment given by each Director; (ii) the
directorships and major commitments of each Director; and (iii) the attendance rate of each Director for the
Board meetings and AGM, the Board is satisfied that all Directors have spent sufficient time in performing
their responsibilities during the Reporting Period.
Chairman and Chief Executive Officer
Code provision A.2.1 of the CG Code stipulates that the roles of Chairman and CEO should be separate and
should not be performed by the same individual. The division of responsibilities between the Chairman and
CEO should be clearly established and set out in writing.
Mr. Lam Kong has been both the Chairman and CEO of the Company and his responsibilities are clearly
set out in writing and approved by the Board. Given the Group’s current stage of development, the Board
considers that vesting the roles of Chairman and CEO in the same person facilitates the execution of the
Group’s business strategies and maximizes effectiveness of its operations. The Board shall nevertheless
review the structure from time to time and shall consider any appropriate adjustments should new
circumstances arise.
Independent Non-Executive Directors
For the year ended 31 December 2013, three independent non-executive Directors were appointed, at least
one of whom has appropriate professional accounting qualifications. The Company has received from each
independent non-executive Director an annual confirmation of his independence, and the Company considers
such Directors to be independent in accordance with each and every guideline set out under the Listing Rules.
The independent non-executive Directors are appointed for a period of one year. All of them are subject to
retirement by rotation and re-election by shareholders at AGM in accordance with the Articles of Association
of the Company. The responsibilities of the independent non-executive Directors include, without limitation:
regular attendance at meetings of the Board and of Board Committees of which they are members; provision
of independent opinion at meetings of the Board and other Board Committees; service on the Audit
Committee, Remuneration Committee and Nomination Committee; and scrutinizing and monitoring the
performance of the Company as a whole.
Directors’ Continuous Professional Development
On appointment to the Board, each newly appointed Director has received professional lawyer’s training
covering the general, statutory and regulatory obligations of being a director of a listed company to ensure
that he/she is sufficiently aware of his /her responsibilities under the Listing Rules and other relevant legal
requirements.
From time to time, the Directors are provided with written materials to develop and refresh their professional
skills. The Company Secretary also organizes and arranges seminars on the latest development of the
applicable laws, rules and regulations for the Directors to assist them in discharging their duties. During
the Reporting Period, the Company organized for the Directors and senior management certain in-house
workshops on the Listing Rules.
- 36 -
Annual Report 2013
According to the records maintained by the Company, the Directors received the following training with an
emphasis on the roles, functions and duties of a director of a listed company in compliance with the revised
CG Code on the continuous professional development during the Reporting Period.
Corporate Governance/ Updates on Laws, rules and
Regulations/Updates on Industry Specific
Written Materials
Briefings/Seminars
Executive Directors
Mr. Lam Kong
√
√
Mr. Chen Hongbing
√
√
Ms. Chen Yanling
√
√
Mr. Hui Ki Fat
√
√
Ms. Sa Manlin
√
Independent Non-Executive Directors
Mr. Cheung Kam Shing, Terry
√
√
Dr. Peng Huaizheng*
√
√
Mr. Huang Ming*
√
√
Mr. Wu Chi Keung
√
√
*Notes:
1.
Dr. Peng Huaizheng resigned on 9 October 2013.
2.
Mr. Huang Ming was appointed on 9 October 2013.
Committees
The Company has established Audit Committee, Remuneration Committee and Nomination Committee.
The function of each of these committees is to study pertinent issues in its area of expertise and to provide
opinion and recommendations for consideration by the Board under its own defined terms of reference.
Audit Committee
The Company established an Audit Committee in 2007. The Audit Committee currently comprises three
independent non-executive Directors, and is chaired by Mr. Wu Chi Keung, with Mr. Cheung Kam Shing,
Terry and Mr. Huang Ming as the Committee members.
The primary duties of the Audit Committee are to provide the Directors with an independent review of
the effectiveness of the financial reporting process, internal control and risk management system of the
Company, to oversee the audit process and to perform other duties and responsibilities as assigned by the
Directors. The Audit Committee also oversees the company’s appointment of external auditors. The annual
result announcement and annual report for the year ended 31 December 2013 have been reviewed by the
Audit Committee, and with recommendation to the Board for approval. The Audit Committee meets at least
twice a year with the external auditors in absence of the executive Directors. The terms of reference of the
Audit Committee are posted on the Stock Exchange’s website (http://www.hkexnews.hk) and the Company’s
website (http://www.cms.net.cn).
- 37 -
Annual Report 2013
For the year ended 31 December 2013, the Audit Committee has held two meetings on 19 March and 6
August 2013, respectively. At the meetings, the Audit Committee reviewed the annual results for 2012 with
the external auditors, the activities of the Group’s internal control functions and also reviewed and approved
the arrangement of the annual audit work and then proposed the recommendations to the Board. Below is the
attendance rate of the committee members:
Committee Members
Mr. Wu Chi Keung
Attendance Rate of the Meeting for the Year ended
31 December 2013
2/2
Mr. Cheung Kam Shing, Terry
2/2
Dr. Peng Huaizheng*
2/2
Mr. Huang Ming*
0/2
*Notes:
1.
Dr. Peng Huaizheng resigned on 9 October 2013.
2.
Mr. Huang Ming was appointed on 9 October 2013.
Remuneration Committee
The Company established a Remuneration Committee in 2007. The Remuneration Committee comprises
three independent non-executive Directors, and is chaired by Mr. Huang Ming, with Mr. Cheung Kam Shing,
Terry and Mr. Wu Chi Keung as the committee members.
The primary duties of the Remuneration Committee include (but without limitation): (i) making
recommendations to the Board on the policy and structure for remunerations of all Directors and senior
management and on the establishment of a formal and transparent procedure for developing policies
on such remuneration; (ii) determining the terms of the specific remuneration package of the Directors
and senior management; (iii) approving the terms of Directors’ service contracts, and (iv) reviewing and
approving performance based remuneration by reference to corporate goals and objectives resolved by the
Directors from time to time. The terms of reference of the Remuneration Committee are posted on the Stock
Exchange’s website (http://www.hkexnews.hk) and the Company’s website (http://www.cms.net.cn).
The Remuneration Committee held two meetings on 6 August and 9 October 2013, respectively. Below is the
attendance rate of the committee members:
Committee Members
Attendance Rate of the Meeting for the Year ended
31 December 2013
Dr. Peng Huaizheng*
1/2
Mr. Huang Ming*
0/2
Mr. Cheung Kam Shing, Terry
2/2
Mr. Wu Chi Keung
2/2
*Notes:
1.
Dr. Peng Huaizheng resigned on 9 October 2013.
2.
Mr. Huang Ming was appointed on 9 October 2013.
- 38 -
Annual Report 2013
Nomination Committee
The Company established the Nomination Committee in 2007. The Nomination Committee comprises one
executive Director and three independent non-executive Directors, and is chaired by Mr. Cheung Kam Shing,
Terry, with Mr. Lam Kong, Mr. Huang Ming and Mr. Wu Chi Keung as the committee members.
The Company is committed to equality of opportunity in all aspects of its business. The Board Diversity
Policy (the “Policy”) was adopted in September 2013.
Diversity of board members can be achieved through consideration of a number of factors, including but
not limited to gender, age, cultural and educational background, or professional experience. In informing its
perspective on diversity, the Company will also take into account factors based on its own business model
and specific needs from time to time.
The Nomination Committee will review the Policy on a regular basis to ensure its continued effectiveness.
The primary duties of the Nomination Committee are to make recommendations to the Directors on all new
appointments of Directors and senior management, interviewing nominees, and to take up references and to
consider related matters. The nomination procedures and the process and criteria adopted by the nomination
committee to select and recommend candidates for directorship are posted on the Company’s website (http://
www.cms.net.cn). The terms of reference of the Nomination Committee are posted on the Stock Exchange’s
website (http://www.hkexnews.hk) and the Company’s website (http://www.cms.net.cn).
The Nomination Committee held three meetings on 26 June, 6 August and 9 October 2013, respectively.
During the Reporting Period, the Nomination Committee has reviewed the appointment of the Directors, the
structure, size and composition of the Board. Below is the attendance rate of the committee members:
Committee Members
Mr. Cheung Kam Shing, Terry
Attendance Rate of the Meeting for the Year ended
31 December 2013
3/3
Mr. Lam Kong
3/3
Mr. Wu Chi Keung
3/3
Dr. Peng Huaizheng*
3/3
Mr. Huang Ming*
0/3
*Notes:
1.
Dr. Peng Huaizheng resigned on 9 October 2013.
2.
Mr. Huang Ming was appointed on 9 October 2013.
Corporate Governance Functions
No corporate governance committee has been established and the Board is responsible for performing the
corporate governance functions such as developing and reviewing the Company’s policies, practices on
corporate governance, training and continuous professional development of directors and senior management,
the Company’s policies and practices on compliance with legal and regulatory requirements, etc.
- 39 -
Annual Report 2013
Auditor’s Remuneration
For the year ended 31 December 2013, we have appointed Deloitte Touche Tohmatsu as our independent
external auditor to provide the annual performance auditing service, the remuneration for the service was
HK$1.7 million.
Directors’ and Auditor’s Responsibilities for Accounts
The Board acknowledges their responsibility for presenting a balanced, clear and understandable assessment
of annual and interim reports, inside information announcements and other financial disclosures required
under the Listing Rules and other regulatory requirements. The Directors confirm that they are responsible
for the preparation of financial reports, and to give a true and fair view of the Company’s and the Group’s
financial status and operating results for the year ended 31 December 2013. In preparing these financial
statements, the Board has selected suitable accounting policies and applied them consistently; made
judgments and estimates that are prudent, fair and reasonable; and have prepared the consolidated financial
statements on a going concern basis.
Internal Controls
The Directors are responsible for maintaining a reliable and effective internal control system. The Company
has established an internal audit department with relatively independent internal audit functions. An audit
committee has also been established and is responsible to the Board. The Directors are in a position to
supervise, assess and improve the Company’s internal controls at all levels of management, so as to ensure
that the Company can withstand changes in its operations and other external influences on its financial,
operational and risk management, in order to safeguard the Company’s assets and promote shareholders’
interests.
For the year ended 31 December 2013, the Company further enhanced its internal control system,
strengthened awareness on risk management, regulated work flows, promoted construction of ERP system
and improved risk management; at the same time, the Company emphasized financial management and
control functions of the Group, enhanced construction of financial system, strengthened audit function,
stabilized investment procedures, and fully reinforced supervision efforts. Through series of measures, both
internal management and operational efficiency of the Group have been significantly improved. The Board of
Directors of the Company review its internal control system from time to time and consider that the internal
control system of the Company is effective, resources in accounting and financial reporting functions,
qualifications of staff and their experience, training undergone and the relevant budget are sufficient.
Shareholders’ Rights
Convening an Extraordinary General Meeting
Pursuant to article 12.3 of Articles of Association of the Company, any one or more shareholders holding at
the date of deposit of the requisition not less than one-tenth of the paid up capital of the Company carrying
the right of voting at general meetings of the Company shall at all times has the right, by written requisition
specifying the objects of the meeting and signed by the requisitionists to the Company’s principal place of
business in Hong Kong at Unit 2106, 21/F, Island Place Tower, 510 King’s Road, North Point, Hong Kong
to require an extraordinary general meeting to be called by the Board for the transaction of any business
specified in such requisition. The same requirement and procedure also applies to any proposal to be tabled at
shareholders’ meetings for adoption.
- 40 -
Annual Report 2013
Shareholders’ Enquiries
Shareholders should direct their questions about their shareholdings to the Company’s branch share registrar,
Computershare Hong Kong Investor Services Limited (Shops 1712-1716, 17M, Hopewell Centre, 183
Queen’s Road East, Wanchai, Hong Kong). Shareholders and the investment community may at any time
make a request for the Company’s information to the extent that such information is publically available.
Shareholders may also make enquiries to the Board by writing to the Company Secretary at the Company’s
principal place of business in Hong Kong at Unit 2106, 21/F, Island Place Tower, 510 King’s Road, North
Point, Hong Kong.
Articles of Association
During the Reporting Period, there were no changes made in the Company’s Articles of Association.
Communications with Shareholders and Investors
The Company actively communicates with shareholders and investors through multiple channels as shown
below: (i) Held Annual General Meeting and Extraordinary General Meeting which provides a platform for
shareholders and investors to communicate with the board of directors of the Company (ii) Timely release
of the latest news and updates of the Company on the official website for the investors viewing; (iii) Send
information and internal magazine of the Company to shareholders and investors through e-mail or post at
regular intervals.
During the Reporting Period, the Company actively attended different forms of investors’ communication
activities, including face to face dialogue with investors, telephone conference and roadshow activities
organized by sell side institutions, with the hope that investors can thoroughly understand the business model
and development strategy of the Company. For the year ended 31 December 2013, Management of the
Company has received over 1,000 domestic and oversea institution representatives or individual investors.
In addition, with the help of independent third-parties we have actively increased the interaction and
communication with investors, and employed professional Hong Kong institution as consultant of investor
relations, effectively maintain and improve investor relations affairs.
The Company believes that shareholders’ rights should be well respected and protected. According to the
Listing Rules, the Company set up Shareholders Communication Policy and will regularly review this
Policy to ensure its effectiveness. As during the Reporting Period, the Company has disclosed all necessary
information to the shareholders in compliance with the Listing Rules, and have reported to our shareholders
and investors through various formal channels, and maintain good communication with shareholders and
investors so that they may make an informed assessment for their investment and exercise their rights as
shareholders. In the future, the Company will maintain effective communications with investors.
- 41 -
Annual Report 2013
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF CHINA MEDICAL SYSTEM HOLDINGS LIMITED
康哲藥業控股有限公司
(incorporated in the Cayman Islands with limited liability)
We have audited the consolidated financial statements of China Medical System Holdings
Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) set out on
pages 44 to 103, which comprise the consolidated statement of financial position as at 31 December
2013, and the consolidated statement of profit or loss and other comprehensive income,
consolidated statement of changes in equity and consolidated statement of cash flows for the year
then ended, and a summary of significant accounting policies and other explanatory information.
Directors’ Responsibility for the Consolidated Financial Statements
The directors of the Company are responsible for the preparation of consolidated financial
statements that give a true and fair view in accordance with International Financial Reporting
Standards and the disclosure requirements of the Hong Kong Companies Ordinance, and for such
internal control as the directors determine is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on
our audit and to report our opinion solely to you, as a body, in accordance with our agreed terms
of engagement, and for no other purpose. We do not assume responsibility towards or accept
liability to any other person for the contents of this report. We conducted our audit in accordance
with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public
Accountants. Those standards require that we comply with ethical requirements and plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on the
auditor’s judgment, including the assessment of the risks of material misstatement of consolidated
financial statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation of consolidated financial statements
that give a true and fair view in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates made by the directors, as well as evaluating
the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
- 42 -
Annual Report 2013
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF CHINA MEDICAL SYSTEM HOLDINGS LIMITED - continued
康哲藥業控股有限公司
(incorporated in the Cayman Islands with limited liability)
Opinion
In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of
the Group as at 31 December 2013, and of the Group’s profit and cash flows for the year then ended in
accordance with International Financial Reporting Standards and have been properly prepared in accordance
with the disclosure requirements of the Hong Kong Companies Ordinance.
Deloitte Touche Tohmatsu
Certified Public Accountants
Hong Kong
26 March 2014
- 43 -
Annual Report 2013
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2013
Turnover
Cost of goods sold
Gross profit
Other gains and losses
Selling expenses
Administrative expenses
Finance costs
Share of result of an associate
NOTES
2013
US$’000
2012
US$’000
5
363,256
(165,172)
281,866
(116,064)
198,084
14,318
(75,516)
(23,503)
(2,715)
83
165,802
6,968
(57,534)
(18,810)
(2,002)
59
6
7
Profit before taxation
Income tax expense
10
110,751
(8,074)
94,483
(9,355)
Profit for the year
11
102,677
85,128
7,031
393
3,356
(764)
(1)
-
2,718
(631)
2
645
9,622
3,127
Total comprehensive income for the year
112,299
88,255
Profit (loss) for the year attributable to:
Owners of the Company
Non-controlling interests
102,825
(148)
85,039
89
102,677
85,128
112,335
(36)
88,161
94
112,299
88,255
US cent
US cent
4.258
3.522
4.258
3.522
Other comprehensive income (expense)
Items that will not be reclassified to profit or loss:
Exchange differences arising on translation
Items that may be reclassified subsequently to profit or loss:
Change in fair value on available-for-sale investments
- fair value gain
- deferred tax relating to change in fair value
Share of other comprehensive income of an associate
Fair value gain on hedging instruments in cash flow hedges
Other comprehensive income for the year,
net of income tax
Total comprehensive income (expense) attributable to:
Owners of the Company
Non-controlling interests
Earnings per share
Basic
13
Diluted
- 44 -
Annual Report 2013
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 2013
NOTES
2013
US$’000
2012
US$’000
14
15
16
17
18
19
20
35,740
9,849
1,034
40,023
180,749
20,288
3,192
10,169
4,440
1,173
35,224
178,634
16,374
2,959
16,157
13,940
307,032
262,913
27,401
140,892
171
73,485
80,031
15,488
92,891
1,052
73,261
107,162
321,980
289,854
40,135
51,521
940
4,278
25,175
64,845
812
2,605
96,874
93,437
Net current assets
225,106
196,417
Total assets less current liabilities
532,138
459,330
12,074
509,655
12,074
436,246
521,729
2,142
448,320
2,654
523,871
450,974
Non-current assets
Property, plant and equipment
Prepaid lease payments
Interest in an associate
Intangible assets
Goodwill
available-for-sale investments
Deferred tax assets
Deposit paid for acquisition of property,
plant and equipment
Current assets
Inventories
Trade and other receivables
Tax recoverable
Pledged bank deposits
Bank balances and cash
21
22
23
23
Current liabilities
Trade and other payables
Secured bank borrowings
Deferred consideration payables
Tax payable
24
25
26
Capital and reserves
Share capital
Reserves
27
28
Equity attributable to owners of the Company
Non-controlling interests
- 45 -
Annual Report 2013
NOTES
Non-current liabilities
Deferred tax liabilities
Deferred consideration payables
20
26
2013
US$’000
2012
US$’000
4,699
3,568
4,999
3,357
8,267
8,356
532,138
459,330
The consolidated financial statements on pages 44 to 103 were approved and authorised for issue by the
Board of Directors on 26 March 2014 and are signed on its behalf by:
LAM Kong
DIRECTOR
CHEN Yanling
DIRECTOR
- 46 -
-
Total comprehensive income for the year
Dividends paid
Dividends proposed
- 47 -
Dividends proposed
Transfer of reserves
Balance at 31 December 2013
from shareholders of non-controlling interests
12,074
-
-
Dividends paid
Acquisition of interest in intangible assets
-
Total comprehensive income for the year
265,647
-
-
-
-
-
-
-
Other comprehensive income for the year
265,647
12,074
-
-
-
-
(4,025)
4,025
-
-
Profit for the year
Balance at 31 December 2012
Transfer of reserves
Bonus issue (note 27)
-
-
Other comprehensive income for the year
-
-
269,672
-
8,049
Profit for the year
Balance at 1 January 2012
2,058
-
-
-
-
-
-
-
2,058
-
-
-
-
-
-
-
2,058
US$’000
US$’000 US$’000
Capital
reserve
Share
premium
Share
capital
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2013
15,944
-
1,819
-
-
-
-
-
14,125
2,626
-
-
-
-
-
-
4,679
-
-
-
-
2,592
2,592
-
2,087
-
-
-
-
2,087
2,087
-
-
(note 28)
11,499
US$’000
US$’000
reserve
22,993
-
-
-
-
6,918
6,918
-
16,075
-
-
-
-
390
390
-
15,685
US$’000
reserve
-
-
-
-
-
-
-
-
-
-
-
-
-
645
645
-
(645)
US$’000
reserve
revaluation Translation Hedging
(note 28)
fund
reserve
Investments
Attributable to the owners of the Company
Surplus
177,495
-
(1,819)
(20,839)
(20,236)
102,825
-
102,825
117,564
(2,626)
-
(18,690)
(15,575)
85,039
-
85,039
69,416
US$’000
profits
20,839
-
-
20,839
(18,690)
-
-
-
18,690
-
-
18,690
(12,879)
-
-
-
12,879
US$’000
reserve
Accumulated Dividend
521,729
-
-
-
(38,926)
112,335
9,510
102,825
448,320
-
-
-
(28,454)
88,161
3,122
85,039
388,613
US$’000
Total
2,142
(476)
-
-
-
(36)
112
(148)
2,654
-
-
-
-
94
5
89
2,560
US$’000
interests
controlling
Non-
523,871
(476)
-
-
(38,926)
112,299
9,622
102,677
450,974
-
-
-
(28,454)
88,255
3,127
85,128
391,173
US$’000
Total
Annual Report 2013
Annual Report 2013
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2013
NOTES
2013
US$’000
2012
US$’000
110,751
94,483
4,148
2,517
1,752
1,277
932
301
235
198
58
(83)
(79)
(6,411)
3,923
1,772
1,285
1,599
25
103
230
(134)
(59)
(5,102)
115,596
(10,342)
(45,579)
3,045
98,125
3,985
(18,692)
(3,301)
Cash generated from operations
PRC Enterprise Income Tax paid
Hong Kong Profits Tax paid
62,720
(8,631)
(7)
80,117
(9,916)
(411)
Net cash from operating activities
54,082
69,790
74,377
6,086
281
221
79
(1,805)
(12,885)
(22,059)
(72,366)
-
82,346
5,102
11
193
(5,752)
(115,998)
(13,635)
(5,244)
(28,071)
(52,977)
Operating activities
Profit before taxation
Adjustments for:
Amortisation of intangible assets
Interest expenses
Depreciation of property, plant and equipment
Impairment loss on goodwill
Allowance for inventories
Loss on disposal of property, plant and equipment
Release of prepaid lease payments
Imputed interest expense on deferred consideration payables
Allowance for (reversal of) bad and doubtful debts
Share of result of an associate
Dividends from available-for-sale investments
Interest income
17
14
18
Operating cash flows before movements in working capital
(Increase) decrease in inventories
Increase in trade and other receivables
Increase (decrease) in trade and other payables
Investing activities
Release of pledged bank deposit
Interest received
Proceeds from disposal of property, plant and equipment
Dividend received from an associate
Dividends received from available-for-sale investments
Purchase of prepaid lease payments
Acquisition of a subsidiary
Purchase of property, plant and equipment
Placement of pledged bank deposit
Purchase of available-for-sale investments
Purchase of intangible assets
Net cash used in investing activities
- 48 -
31
Annual Report 2013
2013
US$’000
2012
US$’000
Financing activities
New bank borrowings raised
Repayment of deferred consideration payables
Interest paid
Dividends paid
Repayment of borrowings
50,236
(1,004)
(382)
(38,926)
(65,897)
107,488
(1,361)
(2,624)
(28,454)
(83,356)
Net cash used in financing activities
(55,973)
(8,307)
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalent at 1 January
Effect of foreign exchange rate changes
(29,962)
107,162
2,831
8,506
97,906
750
80,031
107,162
Cash and cash equivalent at 31 December
represented by bank balances and cash
- 49 -
Annual Report 2013
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2013
1.
GENERAL
The Company was incorporated as an exempted company with limited liability in the Cayman
Islands on 18 December 2006. On 26 June 2007, the Company was listed on the Alternative
Investment Market ("AIM") operated by the London Stock Exchange plc. The Company was listed
on the Main Board operated by the Stock Exchange of Hong Kong Limited on 28 September 2010
and it was delisted from the AIM on the same date. The Company's ultimate holding company and
immediate holding company is Treasure Sea Limited, a company incorporated in the British Virgin
Islands. The address of the Company's registered office is P.O. Box 309, Ugland House, Grand
Cayman, KY1-1104, Cayman Islands. The address of its principal place of business is 8/F., Block
A, Tong Fong Information Centre, Lang Shan Road, Nan Shan, Shenzhen, the People's Republic of
China (the "PRC").
The Company is an investment holding company. The principal activities of its subsidiaries are
production of medicines, marketing, promotion and sale of drugs.
The functional currency of the Company is Renminbi (“rmb”) as it is the currency in which the
majority of the Group’s transactions are denominated. The consolidated financial statements of the
Group are presented in United States Dollars (“US$”), which is a currency widely and commonly
recognised in the global economy and is freely convertible into a number of foreign currencies.
Therefore, the directors consider the presentation in US$ to be more useful for its current and
potential investors.
2.
APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING
STANDARDS (“IFRSs”)
The Group has applied the following new and revised IFRSs issued by the International Accounting
Standards Board (“IASB”) for the first time in the current year:
Amendments to IFRSs
Amendments to IFRS 7
Amendments to IFRS 10,
IFRS 11 and IFRS 12
IFRS 10
IFRS 11
IFRS 12
IFRS 13
IAS 19 (as revised in 2011)
IAS 27 (as revised in 2011)
IAS 28 (as revised in 2011)
Amendments to IAS 1
IFRIC - Int 20
Annual improvements to IFRSs 2009 - 2011 cycle
Disclosures - Offsetting Financial Assets and Financial
Liabilities
Consolidated Financial Statements, Joint Arrangements
and Disclosure of Interests in Other Entities: Transition
Guidance
Consolidated Financial Statements
Joint Arrangements
Disclosure of interests in Other Entities
Fair Value Measurement
Employee Benefits
Separate Financial Statements
Investments in Associates and Joint Ventures
Presentation of Items of Other Comprehensive Income
Stripping Costs in the Production Phase of a Surface
Mine
Except as described below, the application of the new and revised IFRSs in the current year has had
no material impact on the Group’s financial performance and positions for the current and prior years
and/or on the disclosures set out in these consolidated financial statements.
- 50 -
Annual Report 2013
2.
APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING
STANDARDS ("IFRSs") - continued
New and revised Standards on consolidation, joint arrangements, associates and disclosures
In the current year, the Group has applied for the first time the package of five standards on
consolidation, joint arrangements, associates and disclosures comprising IFRS 10 Consolidated
Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other
Entities, IAS 27 (as revised in 2011) Separate Financial Statements and IAS 28 (as revised in 2011)
Investments in Associates and Joint Ventures, together with the amendments to IFRS 10, IFRS 11 and
IFRS 12 regarding transitional guidance.
IAS 27 (as revised in 2011) is not applicable to the Group as it deals only with separate financial
statements.
The impact of the application of these standards is set out below.
Impact of the application of IFRS 12
IFRS 12 is a new disclosure standard and is applicable to entities that have interests in subsidiaries,
joint arrangements, associates and/or unconsolidated structured entities. In general, the application
of IFRS 12 has resulted in more extensive disclosures in the consolidated financial statements (please
see note 16 for details).
IFRS 13 Fair Value Measurement
The Group has applied IFRS 13 for the first time in the current year. IFRS 13 establishes a single
source of guidance for, and disclosures about, fair value measurements. The scope of IFRS 13 is
broad: the fair value measurement requirements of IFRS 13 apply to both financial instrument items
and non-financial instrument items for which other IFRSs require or permit fair value measurements
and disclosures about fair value measurements, except for share-based payment transactions that
are within the scope of IFRS 2 Share-based Payment, leasing transactions that are within the scope
of IAS 17 Leases, and measurements that have some similarities to fair value but are not fair value
(e.g. net realisable value for the purposes of measuring inventories or value in use for impairment
assessment purposes).
IFRS 13 defines the fair value of an asset as the price that would be received to sell an asset (or paid
to transfer a liability, in the case of determining the fair value of a liability) in an orderly transaction
in the principal (or most advantageous) market at the measurement date under current market
conditions. Fair value under IFRS 13 is an exit price regardless of whether that price is directly
observable or estimated using another valuation technique. Also, IFRS 13 includes extensive
disclosure requirements.
Other than the additional disclosures, the application of IFRS 13 has not had any material impact on
the amounts recognised in the consolidated financial statements.
- 51 -
Annual Report 2013
2.
APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING
STANDARDS (“IFRSs”) - continued
Amendments to IAS 1 Presentation of Items of Other Comprehensive Income
The Group has applied the amendments to IAS 1 Presentation of Items of Other Comprehensive
Income. Upon the adoption of the amendments to IAS 1, the Group’s ‘statement of comprehensive
income’ is renamed as the ‘statement of profit or loss and other comprehensive income’.
Furthermore, the amendments to IAS 1 require additional disclosures to be made in the other
comprehensive income section such that items of other comprehensive income are grouped into two
categories: (a) items that will not be reclassified subsequently to profit or loss and (b) items that may
be reclassified subsequently to profit or loss when specific conditions are met. Income tax on items
of other comprehensive income is required to be allocated on the same basis - the amendments do
not change the option to present items of other comprehensive income either before tax or net of
tax. The amendments have been applied retrospectively, and hence the presentation of items of other
comprehensive income has been modified to reflect the changes. Other than the above mentioned
presentation changes, the application of the amendments to IAS 1 does not result in any impact on
profit or loss, other comprehensive income and total comprehensive income.
The Group has not early applied the following new and revised IFRSs that have been issued but are
not yet effective:
Amendments to IFRSs
Amendments to IFRSs
IFRS 9
IFRS 14
Amendments to IFRS 9
and IFRS 7
Amendments to IFRS 10,
IFRS 12 and IAS 27
Amendments to IAS 19
Amendments to IAS 32
Amendments to IAS 36
Amendments to IAS 39
IFRIC - Int 21
1
2
3
4
5
Annual improvements to IFRSs 2010 - 2012 cycle4
Annual improvements to IFRSs 2011 - 2013 cycle2
Financial instruments3
Regulatory Deferral Accounts5
Mandatory Effective Date of IFRS 9 and Transition
Disclosures3
Investment Entities1
Defined Benefit Plans: Employee Contributions2
Offsetting Financial Assets and Financial Liabilities1
Recoverable Amount Disclosures for Non-Financial
Assets1
Novation of Derivatives and Continuation of Hedge
Accounting1
Levies1
Effective for annual periods beginning on or after 1 January 2014.
Effective for annual periods beginning on or after 1 July 2014.
Available for application - the mandatory effective date will be determined when the outstanding phases of IFRS 9 are finalised.
Effective for annual periods beginning on or after 1 July 2014, with limited exception.
Effective for first annual IFRS financial statements beginning on or after 1 January 2016.
- 52 -
Annual Report 2013
2.
APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING
STANDARDS (“IFRSs”) - continued
Annual Improvements to IFRSs 2010-2012 Cycle
The Annual Improvements to IFRSs 2010-2012 Cycle include a number of amendments to various
IFRSs, which are summarised below.
The amendments to IFRS 2 (i) change the definitions of ‘vesting condition’ and ‘market condition’;
and (ii) add definitions for ‘performance condition’ and ‘service condition’ which were previously
included within the definition of ‘vesting condition’. The amendments to IFRS 2 are effective for
share-based payment transactions for which the grant date is on or after 1 July 2014.
The amendments to IFRS 3 clarify that contingent consideration that is classified as an asset or
a liability should be measured at fair value at each reporting date, irrespective of whether the
contingent consideration is a financial instrument within the scope of IFRS 9 or IAS 39 or a nonfinancial asset or liability. Changes in fair value (other than measurement period adjustments) should
be recognised in profit and loss. The amendments to IFRS 3 are effective for business combinations
for which the acquisition date is on or after 1 July 2014.
The amendments to IFRS 8 (i) require an entity to disclose the judgements made by management
in applying the aggregation criteria to operating segments, including a description of the operating
segments aggregated and the economic indicators assessed in determining whether the operating
segments have ‘similar economic characteristics’; and (ii) clarify that a reconciliation of the total of
the reportable segments’ assets to the entity’s assets should only be provided if the segment assets are
regularly provided to the chief operating decision-maker.
The amendments to the basis for conclusions of IFRS 13 clarify that the issue of IFRS 13 and
consequential amendments to IAS 39 and IFRS 9 did not remove the ability to measure short- term
receivables and payables with no stated interest rate at their invoice amounts without discounting, if
the effect of discounting is immaterial.
The amendments to IAS 16 and IAS 38 remove perceived inconsistencies in the accounting for
accumulated depreciation/amortisation when an item of property, plant and equipment or an
intangible asset is revalued. The amended standards clarify that the gross carrying amount is
adjusted in a manner consistent with the revaluation of the carrying amount of the asset and that
accumulated depreciation/amortisation is the difference between the gross carrying amount and the
carrying amount after taking into account accumulated impairment losses.
The amendments to IAS 24 clarify that a management entity providing key management personnel
services to a reporting entity is a related party of the reporting entity. Consequently, the reporting
entity should disclose as related party transactions the amounts incurred for the service paid
or payable to the management entity for the provision of key management personnel services.
However, disclosure of the components of such compensation is not required.
The directors do not anticipate that the application of the amendments included in the Annual
Improvements to IFRSs 2010-2012 Cycle will have a material effect on the Group’s consolidated
financial statements.
- 53 -
Annual Report 2013
2.
APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING
STANDARDS (“IFRSs”) - continued
Annual Improvements to IFRSs 2011-2013 Cycle
The Annual Improvements to IFRSs 2011-2013 Cycle include a number of amendments to various
IFRSs, which are summarised below.
The amendments to IFRS 3 clarify that the standard does not apply to the accounting for the
formation of all types of joint arrangement in the financial statements of the joint arrangement itself.
The amendments to IFRS 13 clarify that the scope of the portfolio exception for measuring the
fair value of a group of financial assets and financial liabilities on a net basis includes all contracts
that are within the scope of, and accounted for in accordance with, IAS 39 or IFRS 9, even if those
contracts do not meet the definitions of financial assets or financial liabilities within IAS 32.
The amendments to IAS 40 clarify that IAS 40 and IFRS 3 are not mutually exclusive and application
of both standards may be required. Consequently, an entity acquiring investment property must
determine whether:
(a)
(b)
the property meets the definition of investment property in terms of IAS 40; and
the transaction meets the definition of a business combination under IFRS 3.
The directors do not anticipate that the application of the amendments included in the Annual
Improvements to IFRSs 2011-2013 Cycle will have a material effect on the Group’s consolidated
financial statements.
IFRS 9 Financial Instruments
IFRS 9 issued in 2009 introduces new requirements for the classification and measurement of
financial assets. IFRS 9 amended in 2011 includes the requirements for the classification and
measurement of financial liabilities and for derecognition, and further amended in 2013 to include
the new requirements for hedging accounting.
Key requirements of IFRS 9 are described as follows:
●●
All recognised financial assets that are within the scope of IAS 39 Financial Instruments:
Recognition and Measurement are subsequently measured at amortised cost or fair value.
Specifically, debt investments that are held within a business model whose objective is to collect
the contractual cash flows, and that have contractual cash flows that are solely payments of
principal and interest on the principal outstanding are generally measured at amortised cost at
the end of subsequent accounting periods. All other debt investments and equity investments
are measured at their fair values at the end of subsequent reporting periods. In addition, under
IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value
of an equity investment (that is not held for trading) in other comprehensive income, with only
dividend income generally recognised in profit or loss.
- 54 -
Annual Report 2013
2.
APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING
STANDARDS (“IFRSs”) - continued
IFRS 9 Financial Instruments - continued
●●
With regard to the measurement of financial liabilities designated as at fair value through profit
or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability that
is attributable to changes in the credit risk of that liability is presented in other comprehensive
income, unless the recognition of the effects of changes in the liability’s credit risk in other
comprehensive income would create or enlarge an accounting mismatch in profit or loss.
Changes in fair value of financial liabilities attributable to changes in the financial liabilities’
credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of
the change in the fair value of the financial liability designated as fair value through profit or loss
was presented in profit or loss.
The new general hedge accounting requirements retain the three types of hedge accounting.
However, greater flexibility has been introduced to the types of transactions eligible for hedge
accounting, specifically broadening the types of instruments that qualify for hedging instruments
and the types of risk components of non-financial items that are eligible for hedge accounting. In
addition, the effectiveness test has been overhauled and replaced with the principle of an ‘economic
relationship’. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced
disclosure requirements about an entity’s risk management activities have also been introduced.
The directors of the Company anticipate that the adoption of IFRS 9 will have no material impact on
the Group’s result, the financial position and disclosure of the Group.
Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets
The amendments to IAS 36 remove the requirement to disclose the recoverable amount of a cashgenerating unit (CGU) to which goodwill or other intangible assets with indefinite useful lives had
been allocated when there has been no impairment or reversal of impairment of the related CGU.
Furthermore, the amendments introduce additional disclosure requirements regarding the fair value
hierarchy, key assumptions and valuation techniques used when the recoverable amount of an asset
or CGU was determined based on its fair value less costs of disposal.
The directors of the Company do not anticipate that the application of these amendments to IAS 36
will have a significant impact on the Group’s consolidated financial statements.
The directors of the Company anticipate that the adoption of other new and revised IFRSs will have
no material impact on the Group’s result, the financial position and disclosure of the Group.
- 55 -
Annual Report 2013
3.
SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with the following
accounting policies which conform with IFRSs. In addition, the consolidated financial statements
include applicable disclosures required by the Rules Governing the Listing of Securities on The
Stock Exchange of Hong Kong Limited and by the Hong Kong Companies Ordinance.
The consolidated financial statements have been prepared on the historical cost basis, except for
certain financial instruments that are measured at fair value, as explained in the accounting policies
set out below. Historical cost is generally based on the fair value of the consideration given in
exchange of goods.
Historical cost is generally based on the fair value of the consideration given in exchange for goods
and services.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date, regardless of whether
that price is directly observable or estimated using another valuation technique. In estimating the
fair value of an asset or a liability, the Group takes into account the characteristics of the asset or
liability if market participants would take those characteristics into account when pricing the asset
or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these
consolidated financial statements is determined on such a basis, except for share-based payment
transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of
IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net
realisable value in IAS 2 or value in use in IAS 36.
In addition, for financial reporting purposes, fair value measurements are categorised into Level 1,
2 or 3 based on the degree to which the inputs to the fair value measurements are observable and
the significance of the inputs to the fair value measurement in its entirety, which are described as
follows:
●●
●●
●●
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the entity can access at the measurement date;
Level 2 inputs are inputs, other than quoted prices included within Level 1, that are
observable for the asset or liability, either directly or indirectly; and
Level 3 inputs are unobservable inputs for the asset or liability.
The principal accounting policies are set out below.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and
entities controlled by the Company and its subsidiaries. Control is achieved when the Company:
●●
●●
●●
has power over the investee;
is exposed, or has rights, to variable returns from its involvement with the investee; and
has the ability to use its power to affect its returns.
The Group reassesses whether or not it controls an investee if facts and circumstances indicate that
there are changes to one or more of the three elements of control listed above.
- 56 -
Annual Report 2013
3.
SIGNIFICANT ACCOUNTING POLICIES - continued
Basis of consolidation - continued
Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases
when the Group loses control of the subsidiary. Specifically, income and expenses of a subsidiary
acquired or disposed of during the year are included in the consolidated statement of profit or loss
and other comprehensive income from the date the Group gains control until the date when the
Group ceases to control the subsidiary.
Profit or loss and each item of other comprehensive income are attributed to the owners of the
Company and to the non-controlling interests. Total comprehensive income of a subsidiary is
attributed to the owners of the Company and to the non-controlling interests even if this results in the
non-controlling interests having a deficit balance.
When necessary, adjustments are made to the financial statements of subsidiaries to bring their
accounting policies into line with the Group’s accounting policies.
All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions
between members of the Group are eliminated in full on consolidation.
Business combinations
Acquisitions of businesses are accounted for using the acquisition method. The consideration
transferred in a business combination is measured at fair value, which is calculated as the sum of the
acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to
former owners of the acquiree and the equity interests issued by the Group in exchange for control of
the acquiree. Acquisition-related costs are generally recognised in profit or loss as incurred.
At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at
their fair values, except that:
●●
●●
●●
deferred tax assets or liabilities, and assets or liabilities related to employee benefit
arrangements are recognised and measured in accordance with IAS 12 Income taxes and IAS
19 Employee benefits respectively;
liabilities or equity instruments related to share-based payment arrangements of the acquiree
or share-based payment arrangements of the Group entered into to replace share-based
payment arrangements of the acquiree are measured in accordance with IFRS 2 Share-based
payment at the acquisition date; and
assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Noncurrent assets held for sale and discontinued operations are measured in accordance with
that standard.
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any
non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity
interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets
acquired and the liabilities assumed. If, after re-assessment, the net of the acquisition-date amounts
of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration
transferred, the amount of any non-controlling interests in the acquiree and the fair value of the
acquirer’s previously held interest in the acquiree (if any), the excess is recognised immediately in
profit or loss as a bargain purchase gain.
- 57 -
Annual Report 2013
3.
SIGNIFICANT ACCOUNTING POLICIES - continued
Business combinations - continued
Non-controlling interests that are present ownership interests and entitle their holders to a
proportionate share of the entity’s net assets in the event of liquidation may be initially measured
either at fair value or at the non-controlling interests’ proportionate share of the recognised amounts
of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transactionby-transaction basis. Other types of non-controlling interests are measured at their fair value or,
when applicable, on the basis specified in another IFRS.
Goodwill
Goodwill arising on an acquisition of a business is carried at cost as established at the date of
acquisition of the business (see the accounting policy above) less accumulated impairment losses, if
any.
For the purposes of impairment testing, goodwill is allocated to each of the cash-generating units (or
groups of cash-generating units) that is expected to benefit from the synergies of the combination.
A cash-generating unit to which goodwill has been allocated is tested for impairment annually or
more frequently whenever there is indication that the unit may be impaired. For goodwill arising on
an acquisition in a reporting period, the cash-generating unit to which goodwill has been allocated is
tested for impairment before the end of that reporting period. If the recoverable amount of the cashgenerating unit is less than the carrying amount of the unit, the impairment loss is allocated first to
reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the
unit pro rata on the basis of the carrying amount of each asset in the unit. Any impairment loss for
goodwill is recognised directly in profit or loss. An impairment loss recognised for goodwill is not
reversed in subsequent periods.
On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in
the determination of the amount of profit or loss on disposal.
Investments in associates
An associate is an entity over which the Group has significant influence. Significant influence is the
power to participate in the financial and operating policy decisions of the investee but is not control
or joint control over those policies.
The results and assets and liabilities of an associate are incorporated in these consolidated financial
statements using the equity method of accounting. The financial statements of the associate used for
equity accounting purposes are prepared using uniform accounting policies as those of the Group
for like transactions and events in similar circumstances. Under the equity method, an investment
in an associate is initially recognised in the consolidated statement of financial position at cost and
adjusted thereafter to recognise the Group’s share of the profit or loss and other comprehensive
income of the associate. When the Group’s share of losses of an associate exceeds the Group’s
interest in that associate (which includes any long-term interests that, in substance, form part of the
Group’s net investment in the associate), the Group discontinues recognising its share of further
losses. Additional losses are recognised only to the extent that the Group has incurred legal or
constructive obligations or made payments on behalf of the associate.
- 58 -
Annual Report 2013
3.
SIGNIFICANT ACCOUNTING POLICIES - continued
Investments in associates - continued
An investment in an associate is accounted for using the equity method from the date on which
the investee becomes an associate. On acquisition of the investment in an associate, any excess of
the cost of the investment over the Group’s share of the net fair value of the identifiable assets and
liabilities of the investee is recognised as goodwill, which is included within the carrying amount of
the investment. Any excess of the Group’s share of the net fair value of the identifiable assets and
liabilities over the cost of the investment, after reassessment, is recognised immediately in profit or
loss in the period in which the investment is acquired.
The requirements of IAS 39 are applied to determine whether it is necessary to recognise any
impairment loss with respect to the Group’s investment in an associate. When necessary, the entire
carrying amount of the investment (including goodwill) is tested for impairment in accordance
with IAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of
value in use and fair value less costs of disposal) with its carrying amount. Any impairment loss
recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss
is recognised in accordance with IAS 36 to the extent that the recoverable amount of the investment
subsequently increases.
When a group entity transacts with an associate of the Group (such as a sale or contribution of
assets), profits and losses resulting from the transactions with the associate are recognised in the
Group’s consolidated financial statements only to the extent of interests in the associate that are not
related to the Group.
Intangible assets
Intangible assets acquired separately
Intangible assets with finite useful lives that are acquired separately are carried at costs less
accumulated amortisation and any accumulated impairment losses. Amortisation for intangible assets
with finite useful lives is recognised on a straight-line basis over their estimated useful lives. The
estimated useful life and amortisation method are reviewed at the end of each reporting period, with
the effect of any changes in estimate being accounted for on a prospective basis (see the accounting
policy in respect of impairment losses on tangible and intangible assets below).
Internally-generated intangible assets - research and development expenditure
Expenditure on research activities is recognised as an expense in the period in which it is incurred.
An internally-generated intangible asset arising from development activities (or from the
development phase of an internal project) is recognised if, and only if, all of the following have been
demonstrated:
●●
●●
●●
●●
●●
●●
the technical feasibility of completing the intangible asset so that it will be available for use
or sale;
the intention to complete the intangible asset and use or sell it;
the ability to use or sell the intangible asset;
how the intangible asset will generate probable future economic benefits;
the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset; and
the ability to measure reliably the expenditure attributable to the intangible asset during its
development.
- 59 -
Annual Report 2013
3.
SIGNIFICANT ACCOUNTING POLICIES - continued
Intangible assets - continued
Internally-generated intangible assets - research and development expenditure - continued
The amount initially recognised for internally-generated intangible asset is the sum of the expenditure
incurred from the date when the intangible asset first meets the recognition criteria. Where no
internally-generated intangible asset can be recognised, development expenditure is recognised in
profit or loss in the period in which it is incurred.
Subsequent to initial recognition, internally-generated intangible assets are reported at cost less
accumulated amortisation and accumulated impairment losses (if any), on the same basis as
intangible assets that are acquired separately.
Intangible assets acquired in a business combination
Intangible assets acquired in a business combination are recognised separately from goodwill and are
initially recognised at their fair value at the acquisition date (which is regarded as their cost).
Subsequent to initial recognition, intangible assets acquired in a business combination with finite
useful lives are reported at costs less accumulated amortisation and any accumulated impairment
losses, on the same basis as intangible assets that are acquired separately (see the accounting policy
in respect of impairment losses on tangible and intangible assets below).
An intangible asset is derecognised on disposal, or when no future economic benefits are expected
from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as
the difference between the net disposal proceeds and the carrying amount of the asset are recognised
in profit or loss when the asset is derecognised.
Property, plant and equipment
Property, plant and equipment including buildings held for use in the production or supply of goods
or services, or for administrative purposes (other than construction in progress) are stated in the
consolidated statement of financial position at cost less subsequent accumulated depreciation and
subsequent accumulated impairment losses, if any.
Properties in the course of construction for production, supply or administrative purposes are
carried at cost, less any recognised impairment loss. Costs include professional fees and, for
qualifying assets, borrowing costs capitalised in accordance with the Group’s accounting policy.
Such properties are classified to the appropriate categories of property, plant and equipment when
completed and ready for intended use. Depreciation of these assets, on the same basis as other
property assets, commences when the assets are ready for their intended use.
Depreciation is recognised so as to write off the cost of items of property, plant and equipment
(other than construction in progress) less their residual values over their estimated useful lives, using
the straight-line method. The estimated useful lives, residual values and depreciation method are
reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for
on a prospective basis.
An item of property, plant and equipment is derecognised upon disposal or when no future economic
benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the
disposal or retirement of an item of property, plant and equipment is determined as the difference
between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.
- 60 -
Annual Report 2013
3.
SIGNIFICANT ACCOUNTING POLICIES - continued
Impairment losses on tangible and intangible assets other than goodwill (see the accounting policy in
respect of goodwill above)
At the end of the reporting period, the Group reviews the carrying amounts of its tangible and
intangible assets with finite useful lives to determine whether there is any indication that those assets
have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset
is estimated in order to determine the extent of the impairment loss, if any. When it is not possible to
estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount
of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of
allocation can be identified, corporate assets are also allocated to individual cash-generating units,
or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable
and consistent allocation basis can be identified.
Recoverable amount is the higher of fair value less costs of disposal and value in use. In assessing
value in use, the estimated future cash flows are discounted to their present value using a pretax discount rate that reflects current market assessments of the time value of money and the risks
specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or a cash-generating unit) is estimated to be less than its
carrying amount, the carrying amount of the asset (or a cash-generating unit) is reduced to its
recoverable amount. An impairment loss is recognised immediately in profit or loss.
Where an impairment loss subsequently reverses, the carrying amount of the asset (or a cashgenerating unit) is increased to the revised estimate of its recoverable amount, but so that the
increased carrying amount does not exceed the carrying amount that would have been determined
had no impairment loss been recognised for the asset (or a cash-generating unit) in prior years. A
reversal of an impairment loss is recognised immediately in profit or loss.
Prepaid lease payments
Prepaid lease payments represent the cost of land use rights paid to the local land bureau of the PRC
Government.
Land use rights are stated at cost and are charged to profit or loss in the consolidated statement profit
or loss and other comprehensive income over the period for which the relevant land use right has
been granted to the Group.
Inventories
Inventories are stated at the lower of cost and net realisable value. Costs of inventories are
determined on a weighted average method. Net realisable value represents the estimated selling
price for inventories less all estimated costs of completion and costs necessary to make the sale.
- 61 -
Annual Report 2013
3.
SIGNIFICANT ACCOUNTING POLICIES - continued
Financial instruments
Financial assets and financial liabilities are recognised when a group entity becomes a party to the
contractual provisions of the instrument.
Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are
directly attributable to the acquisition or issue of financial assets and financial liabilities (other than
financial assets or financial liabilities at fair value through profit or loss (“FVTPL”)) are added to or
deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial
recognition. Transaction costs directly attributable to the acquisition of financial assets or financial
liabilities at fair value through profit or loss are recognised immediately in profit or loss.
Financial assets
Financial assets are classified into loans and receivables and available-for-sale (“AFS”) financial
assets. The classification depends on the nature and purpose of the financial assets and is determined
at the time of initial recognition. All regular way purchases or sales of financial assets are recognised
and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of
financial assets that require delivery of assets within the time frame established by regulation or
convention in the marketplace.
Effective interest method
The effective interest method is a method of calculating the amortised cost of a debt instrument
and of allocating interest income over the relevant period. The effective interest rate is the rate that
exactly discounts estimated future cash receipts (including all fees and points paid or received that
form an integral part of the effective interest rate, transaction costs and other premiums or discounts)
through the expected life of the debt instrument, or, where appropriate, a shorter period to the net
carrying amount on initial recognition.
Interest income is recognised on an effective interest basis for debt instruments.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments
that are not quoted in an active market. Subsequent to initial recognition, loans and receivables
(including trade and other receivables, pledged bank deposits and bank balances and cash) are carried
at amortised cost using the effective interest method, less any impairment (see accounting policy on
impairment loss on financial assets below).
Interest income is recognised by applying the effective interest rate, except for short-term receivables
where the recognition of interest would be immaterial.
- 62 -
Annual Report 2013
3.
SIGNIFICANT ACCOUNTING POLICIES - continued
Financial instruments - continued
Financial assets - continued
AFS financial assets
AFS financial assets are non-derivatives that are either designated as available-for-sale or are not
classified as financial assets at FVTPL, loans and receivables or held-to-maturity investments.
Equity securities held by the Group that are classified as AFS financial assets and are traded in an
active market are measured at fair value at the end of each reporting period. Changes in the carrying
amount of AFS monetary financial assets relating to interest income calculated using the effective
interest method and dividends on AFS equity investments are recognised in profit or loss. Other
changes in the carrying amount of AFS financial assets are recognised in other comprehensive
income and accumulated under the heading of investments revaluation reserve. When the investment
is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated
in the investments revaluation reserve is reclassified to profit or loss (see the accounting policy in
respect of impairment loss on financial assets below).
Impairment of financial assets
Financial assets are assessed for indicators of impairment at the end of each reporting period.
Financial assets are considered to be impaired where there is objective evidence that, as a result of
one or more events that occurred after the initial recognition of the financial asset, the estimated
future cash flows of the financial assets have been affected.
For AFS equity investments, a significant or prolonged decline in the fair value of that investment
below its cost is considered to be objective evidence of impairment.
For all other financial assets, objective evidence of impairment could include:
●●
●●
●●
significant financial difficulty of the issuer or counterparty; or
breach of contract, such as a default or delinquency in interest or principal payments; or
it becoming probable that the borrower will enter bankruptcy or financial re-organisation.
For certain categories of financial assets, such as trade and other receivables that are assessed not to
be impaired individually are, in addition, assessed for impairment on a collective basis. Objective
evidence of impairment for a portfolio of receivables could include the Group’s past experience of
collecting payments, an increase in the number of delayed payments in the portfolio past the credit
period granted, observable changes in national or local economic conditions that correlate with
default on receivables.
For financial assets carried at amortised cost, the amount of the impairment loss recognised is the
difference between the asset’s carrying amount and the present value of the estimated future cash
flows discounted at the financial asset’s original effective interest rate.
- 63 -
Annual Report 2013
3.
SIGNIFICANT ACCOUNTING POLICIES - continued
Financial instruments - continued
Financial assets - continued
Impairment of financial assets - continued
The carrying amount of the financial asset is reduced by the impairment loss directly for all financial
assets with the exception of trade and other receivables, where the carrying amount is reduced
through the use of an allowance account. Changes in the carrying amount of the allowance account
are recognised in profit or loss. When trade and other receivables are considered uncollectible, they
are written off against the allowance account. Subsequent recoveries of amounts previously written
off are credited to profit or loss.
When an AFS financial asset is considered to be impaired, cumulative gains or losses previously
recognised in other comprehensive income are reclassified to profit or loss in the period.
For financial assets measured at amortised cost, if, in a subsequent period, the amount of impairment
loss decreases and the decrease can be related objectively to an event occurring after the impairment
losses was recognised, the previously recognised impairment loss is reversed through profit or loss to
the extent that the carrying amount of the investment at the date the impairment is reversed does not
exceed what the amortised cost would have been had the impairment not been recognised.
In respect of AFS equity investment, impairment losses previously recognised in profit or loss are
not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is
recognised directly in other comprehensive income and accumulated under the heading of investment
revaluation reserve.
Financial liabilities and equity instruments
Debt and equity instruments issued by a group entity are classified as either financial liabilities or
as equity in accordance with the substance of the contractual arrangements and the definitions of a
financial liability and an equity instrument.
Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds
received, net of direct issue costs.
Effective interest method
The effective interest method is a method of calculating the amortised cost of a financial liability
and of allocating interest expense over the relevant period. The effective interest rate is the rate that
exactly discounts estimated future cash payments (including all fees and points paid or received that
form an integral part of the effective interest rate, transaction costs and other premiums or discounts)
through the expected life of the financial liability, or, where appropriate, a shorter period, to the net
carrying amount on initial recognition.
Interest expense is recognised on an effective interest basis.
- 64 -
Annual Report 2013
3.
SIGNIFICANT ACCOUNTING POLICIES - continued
Financial instruments - continued
Financial liabilities and equity instruments - continued
Financial liabilities
The Group’s financial liabilities, including trade and other payables, secured bank borrowings and
deferred consideration payables, are subsequently measured at amortised cost, using the effective
interest method.
Derivative financial instruments and hedging
Derivatives are initially recognised at fair value at the date when derivative contracts are entered
into and are subsequently remeasured to their fair values at the end of the reporting period. The
resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated
and effective as a hedging instrument, in which case the timing of the recognition in profit or loss
depends on the nature of the hedge relationship.
Hedge accounting
The Group used derivative financial instruments (primarily interest rate swaps and foreign currency
forward contracts) to hedge its exposure against changes in interest rate and foreign currency
exposure on bank borrowings.
At the inception of the hedging relationship the Group documents the relationship between the
hedging instrument and hedged item, along with its risk management objectives and its strategy
for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an
ongoing basis, the Group documents whether the hedging instrument that is highly effective in
offsetting changes in cash flows of the hedged item attributable to the hedged risk.
Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as
cash flow hedges are recognised in other comprehensive income and accumulated under the heading
of hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in
profit or loss and is included in the “other gains and losses” line item.
Amounts previously recognised in other comprehensive income and accumulated in equity (hedging
reserve) are reclassified to profit or loss in the periods when the hedged item is recognised in profit or
loss, in the same line of the consolidated statement of profit or loss and other comprehensive income
as the recognised hedged item.
Hedge accounting is discontinued when the Group revokes the hedging relationship, when the
hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for
hedge accounting.
- 65 -
Annual Report 2013
3.
SIGNIFICANT ACCOUNTING POLICIES - continued
Financial instruments - continued
Derecognition
The Group derecognises a financial asset only when the contractual rights to the cash flows from
the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of
ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the
risks and rewards of ownership and continues to control the transferred asset, the Group continues to
recognise the asset to the extent of its continuing involvement and recognises an associated liability.
If the Group retains substantially all the risks and rewards of ownership of a transferred financial
asset, the Group continues to recognise the financial asset and also recognises a collateralised
borrowing for the proceeds received.
On derecognition of a financial asset in its entirety, the difference between the asset’s carrying
amount and the sum of the consideration received and receivable and the cumulative gain or loss
that had been recognised in other comprehensive income and accumulated in equity is recognised in
profit or loss.
The Group derecognises a financial liability when, and only when, the Group’s obligations are
discharged, cancelled or expire. The difference between the carrying amount of the financial liability
derecognised and the consideration paid and payable is recognised in profit or loss.
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable. Revenue is
reduced for estimated customer returns, rebates and other similar allowances.
Revenue from the sale of goods is recognised when the goods are delivered and titles have passed, at
which time all the following conditions are satisfied:
●●
●●
●●
●●
●●
the Group has transferred to the buyer the significant risks and rewards of ownership of
the goods;
the Group retains neither continuing managerial involvement to the degree usually associated
with ownership nor effective control over the goods sold;
the amount of revenue can be measured reliably;
it is probable that the economic benefits associated with the transaction will flow to the
Group; and
the costs incurred or to be incurred in respect of the transaction can be measured reliably.
Service fee income is recognised when services are provided.
Interest income from a financial asset is recognised when it is probable that the economic benefits
will flow to the Group and the amount of income can be measured reliably. Interest income is
accrued on a time basis, by reference to the principal outstanding and at the effective interest rate
applicable, which is the rate that exactly discounts the estimated future cash receipts through the
expected life of the financial asset to that asset’s net carrying amount on initial recognition.
Dividend income from investments is recognised when the shareholders’ rights to receive payment
have been established (provided that it is probable that the economic benefits will flow to the Group
and the amount of income can be measured reliably).
- 66 -
Annual Report 2013
3.
SIGNIFICANT ACCOUNTING POLICIES - continued
Taxation
Income tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from ‘profit
before taxation’ as reported in the consolidated statement of profit or loss and other comprehensive
income because of income or expense that are taxable or deductible in other years and items that are
never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that
have been enacted or substantively enacted by the end of the reporting period.
Deferred tax is recognised on temporary differences between the carrying amounts of assets and
liabilities in the consolidated financial statements and the corresponding tax base used in the
computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable
temporary differences. Deferred tax assets are generally recognised for all deductible temporary
difference to the extent that it is probable that taxable profits will be available against which those
deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the
temporary difference arises from goodwill or from the initial recognition (other than in a business
combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor
the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences associated with investments
in subsidiaries and an associate, except where the Group is able to control the reversal of the
temporary difference and it is probable that the temporary difference will not reverse in the
foreseeable future. Deferred tax assets arising from deductible temporary differences associated with
such investments and interests are only recognised to the extent that it is probable that there will be
sufficient taxable profits against which to utilise the benefits of the temporary differences and they
are expected to reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at the end of the reporting period and reduced
to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or
part of the asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the
period in which the liability is settled or the asset is realised, based on tax rate (and tax laws) that
have been enacted or substantively enacted by the end of the reporting period. The measurement of
deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in
which the Group expects, at the end of the reporting period, to recover or settle the carrying amount
of its assets and liabilities.
Current and deferred tax is recognised in profit or loss, except when they relate to items that are
recognised in other comprehensive income or directly in equity, in which case, the current and
deferred tax are also recognised in other comprehensive income or directly in equity respectively.
Where current tax or deferred tax arises from the initial accounting for a business combination, the
tax effect is included in the accounting for the business combination.
- 67 -
Annual Report 2013
3.
SIGNIFICANT ACCOUNTING POLICIES - continued
Foreign currencies
In preparing the financial statements of each individual group entity, transactions in currencies
other than the functional currency of that entity (foreign currencies) are recognised at the rates of
exchanges prevailing on the dates of the transactions. At the end of the reporting period, monetary
items denominated in foreign currencies are retranslated at the rates prevailing at that date. Nonmonetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences on monetary items are recognised in profit or loss in the period in which they
arise except for:
●●
●●
●●
exchange differences on foreign currency borrowings relating to assets under construction
for future productive use, which are included in the cost of those assets when they are
regarded as an adjustment to interest costs on those foreign currency borrowings;
exchange differences on transactions entered into in order to hedge certain foreign currency
risks (see the accounting policies below); and
exchange differences on monetary items receivable from or payable to a foreign operation
for which settlement is neither planned nor likely to occur (therefore forming part of the net
investment in the foreign operation), which are recognised initially in other comprehensive
income and reclassified from equity to profit or loss on repayment of the monetary items.
For the purposes of presenting the consolidated financial statements, the assets and liabilities of
the Group’s operations are translated into the presentation currency of the Group (i.e. US$) using
exchange rates prevailing at the end of each reporting period. Income and expenses items are
translated at the average exchange rates for the period, unless exchange rates fluctuate significantly
during the period, in which case, the exchange rates prevailing at the dates of transactions are used.
Exchange differences arising, if any, are recognised in other comprehensive income and accumulated
in equity under the heading of translation reserve.
Leasing
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the
risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
The Group as lessee
Operating lease payments are recognised as an expense on a straight-line basis over the lease term,
except where another systematic basis is more representative of the time pattern in which economic
benefits from the leased asset are consumed. Contingent rentals arising under operating leases are
recognised as an expense in the period in which they are incurred.
In the event that lease incentives are received to enter into operating leases, such incentives are
recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental
expense on a straight-line basis, except where another systematic basis is more representative of the
time pattern in which economic benefits from the leased asset are consumed.
- 68 -
Annual Report 2013
3.
SIGNIFICANT ACCOUNTING POLICIES - continued
Leasing - continued
Leasehold land and building
When a lease includes both land and building elements, the Group assesses the classification of
each element as a finance or an operating lease separately based on the assessment as to whether
substantially all the risks and rewards incidental to ownership of each element have been transferred
to the Group, unless it is clear that both elements are operating leases in which case the entire lease
is classified as an operating lease. Specifically, the minimum lease payments (including any lumpsum upfront payments) are allocated between the land and the building elements in proportion to the
relative fair values of the leasehold interests in the land element and building element of the lease at
the inception of the lease.
To the extent the allocation of the lease payments can be made reliably, interest in leasehold land that
is accounted for as an operating lease is presented as “prepaid lease payments” in the consolidated
statement of financial position and is amortised over the lease term on a straight-line basis. When the
lease payments cannot be allocated reliably between the land and building elements, the entire lease
is generally classified as a finance lease and accounted for as property, plant and equipment.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying
assets, which are assets that necessarily take a substantial period of time to get ready for their
intended use or sale, are added to the cost of those assets until such time as the assets are substantially
ready for their intended use or sale.
Investment income earned on the temporary investment of specific borrowings pending their
expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.
All other borrowing costs are recognised in profit or loss in the period in which they are incurred.
Government grants
Government grants are not recognised until there is reasonable assurance that the Group will comply
with the conditions attaching to them and that the grants will be received.
Government grants that are receivable as compensation for expenses or losses already incurred or
for the purpose of giving immediate financial support to the Group with no future related costs are
recognised in profit or loss in the period in which they become receivable.
Retirement benefit costs
Payments to state-managed retirement benefit schemes, which is a defined contribution scheme, are
recognised as expenses when employees have rendered service entitling them to the contributions.
Payment to Key Employee Benefit Scheme, which is classified as a defined contribution scheme,
are recognized as expenses in the reporting period in which the Board of Directors approve for the
comtribution to a trust.
- 69 -
Annual Report 2013
4.
KEY SOURCES OF ESTIMATION UNCERTAINTY
The key assumptions concerning the future, and other key sources of estimation uncertainty at
the end of the reporting period, that have a significant risk of causing a material adjustment to the
carrying amount of assets and liabilities within the next financial year.
Estimated impairment of goodwill and intangible assets
For the purpose of impairment testing, the entire amount of goodwill and part of the intangible
assets has been allocated to the four (2012: three) cash generating units (“CGU”s) (see note 18).
The impairment assessment is based on the higher of fair value less costs to sell and value in use of
the CGUs. The value in use of the related CGUs requires the Group to estimate the expected future
cash flows from the CGUs. If the actual future cash flows are less than expected, impairment may
be required. In the opinion of the directors of the Company, no impairment of intangible assets is
required for the year ended 31 December 2013 and 2012. As at 31 December 2013, the carrying
amount of goodwill is US$180,749,000 (net of impairment loss of US$1,277,000) (2012: carrying
amount of US$178,634,000, net of impairment loss of nil).
Deferred tax assets
As at 31 December 2013, a deferred tax asset of approximately US$3,192,000 (2012: US$2,959,000)
in relation to unrealised profits on inventories and impairment loss on property, plant and equipment
has been recognised in the Group’s consolidated statement of financial position. The recognition
of the deferred tax asset mainly depends on whether sufficient future profits or taxable temporary
differences will be available in the future. In cases where the actual future taxable profits generated
are less than expected, a material reversal of deferred tax assets may arise, which would be
recognised in the profit or loss in the period in which such a reversal takes places.
Estimated impairment of trade receivables
On assessing any impairment of the Group’s trade receivables, the management regularly reviews the
recoverability, creditworthiness of customers and ages of the trade receivables. Impairment on trade
receivables is made on the estimation of the future cash flows discounted at an effective interest rate.
If the financial condition of the customers of the Group were deteriorated, resulting in an impairment
of their ability to make payments, additional impairment may be required. As at 31 December
2013, the carrying amounts of trade receivables (net of allowance for bad and doubtful debts) and
allowance for bad and doubtful debts are approximately US$62,312,000 (2012: US$50,345,000) and
US$256,000 (2012: US$191,000), respectively.
Estimated allowance for inventories
As at 31 December 2013, the carrying amount of the Group’s inventories is US$27,401,000 (2012:
US$15,488,000). The management of the Group reviews an ageing analysis at the end of the
reporting period, and makes allowance for obsolete and slow-moving inventory items identified
that are no longer suitable for use in production or sale. The Group carries out an inventory review
on a product-by-product basis at the end of the reporting period and makes allowance for obsolete
and slow moving items. The management also estimates the net realisable value for finished
goods, work-in progress and raw materials based primarily on the latest invoice prices and current
market conditions. If the conditions of inventory of the Group become no longer suitable for use in
production or sale, an additional allowance may be required.
- 70 -
Annual Report 2013
5.
TURNOVER AND SEGMENT INFORMATION
Turnover represents the net amount received and receivable for goods sold during the year.
The Group determines its operating segments based on the internal reports reviewed by the chief
operating decision maker, the Executive Directors of the Company that are used to resources
allocation and assessment of segment performance.
The Group only has one reportable operating segment, that is marketing, promotion, sales and
manufacturing of pharmaceutical products. Other than revenue analysis that is disclosed below,
no operating results and other discrete financial information is available for the assessment of
performance of the respective business divisions and resources allocation purpose.
No analysis of the Group’s assets and liabilities by operating segments is disclosed as it is not
regularly provided to the chief operating decision maker for review.
The Group primarily operates in the PRC. All revenue for external customers are attributed to the
PRC and a majority of non-current assets of the Group are located in the PRC.
Revenue from major products
The following is an analysis of the Group’s revenue by major products:
2013
US$’000
2012
US$’000
Deanxit
Ursofalk
ShaDuoLiKa
XinHuoSu
YiNuoShu
Salofalk
Bioflor
Augentropfen Stulln Mono eye-drops
GanFuLe
Exacin
XiDaKang
Cystistat
Yin Lin Qing Gan Ka Li
Others
101,485
73,108
52,345
36,641
29,497
16,348
15,031
13,126
5,844
4,044
3,956
1,038
326
10,467
88,079
60,750
22,520
26,820
26,150
11,439
9,214
13,280
5,018
3,684
3,326
1,041
81
10,464
Total
363,256
281,866
No single customer contributes over 10% of the total sales of the Group for both years.
- 71 -
Annual Report 2013
6.
OTHER GAINS AND LOSSES
Interest income
Net exchange gain (loss)
Government subsidies (note)
Dividends from available-for-sale investments
Loss on disposal of property, plant and equipment
Impairment loss on goodwill (note 18)
Fair value change on investments held for trading
Others
2013
US$’000
2012
US$’000
6,411
4,751
3,755
79
(301)
(1,277)
900
5,102
(720)
2,010
(25)
2
599
14,318
6,968
Note: The amounts for both years mainly represented the incentive subsidies provided by the PRC
local authorities to the Group to reimburse the research and development expenses incurred
in prior years and other subsidies granted to the Group to encourage business operation in
the PRC. There were no unfulfilled conditions attached to these grants and, the Group has
recognised the grants upon receipts.
7.
FINANCE COSTS
Interest on bank borrowings wholly repayable within
five years
Imputed interest on deferred consideration payables
8.
2013
US$’000
2012
US$’000
2,517
198
1,772
230
2,715
2,002
2013
US$’000
2012
US$’000
184
184
416
14
332
19
614
535
DIRECTORS’ AND CHIEF EXECUTIVE’S EMOLUMENTS
Directors’ fees
Other emoluments to executive directors
- basic salaries and allowances
- retirement benefits scheme contributions
- 72 -
Annual Report 2013
8.
DIRECTORS’ AND CHIEF EXECUTIVE’S EMOLUMENTS - continued
Details of emoluments paid by the Group to the directors and the chief executive are as follows:
Mr. Lam Kong
- directors’ fee
- basic salaries and allowances
- retirement benefits scheme contributions
Mr. Chen Hong Bing
- directors’ fee
- basic salaries and allowances
- retirement benefits scheme contributions
Ms. Hou Xiao Xuan (Note 1)
- directors’ fee
- basic salaries and allowances
- retirement benefits scheme contributions
Ms. Chen Yan Ling
- directors’ fee
- basic salaries and allowances
- retirement benefits scheme contributions
Mr. Hui Ki Fat
- directors’ fee
- basic salaries and allowances
- retirement benefits scheme contributions
- 73 -
2013
US$’000
2012
US$’000
23
93
2
23
93
2
118
118
23
106
6
23
104
5
135
132
-
22
7
-
29
23
85
6
23
84
5
114
112
23
47
-
23
46
-
70
69
Annual Report 2013
8.
DIRECTORS’ AND CHIEF EXECUTIVE’S EMOLUMENTS - continued
Ms. Sa Man Lin (Note 2)
- directors’ fee
- basic salaries and allowances
- retirement benefits scheme contributions
Mr. Peng Huaizheng (Note 3)
- directors’ fee
- basic salaries and allowances
- retirement benefits scheme contributions
Mr. Wu Chi Keung
- directors’ fee
- basic salaries and allowances
- retirement benefits scheme contributions
Mr. Cheung Kam Shing, Terry
- directors’ fee
- basic salaries and allowances
- retirement benefits scheme contributions
Mr. Huang Ming (Note 4)
- directors’ fee
- basic salaries and allowances
- retirement benefits scheme contributions
Total
2013
US$’000
2012
US$’000
23
85
-
1
5
-
108
6
18
-
23
-
18
23
23
-
23
-
23
23
23
-
23
-
23
23
5
-
-
5
-
614
535
Notes:
1.
2.
3.
4.
Resigned on 11 December 2012.
Appointed on 11 December 2012.
Resigned on 9 October 2013.
Appointed on 9 October 2013.
Mr. Lam Kong is also the Chief Executive of the Company and his emoluments disclosed above
include those for services rendered by him as the Chief Executive.
- 74 -
Annual Report 2013
9.
EMPLOYEES’ EMOLUMENTS
The five highest paid individuals for the year ended 31 December 2013 included four directors (2012:
three), details of whose emoluments are set out above. The emoluments of the remaining individual
for the year ended 31 December 2013 (2012: two individuals) were as follows:
Employees
- basic salaries and allowances
- retirement benefits scheme contributions
2013
US$’000
2012
US$’000
102
5
195
9
107
204
The emoluments of the employee were within the following bands:
Number of employees
2013
2012
Up to HK$1,000,000 (equivalent to approximately US$129,000)
1
2
During the year, no emoluments were paid by the Group to the directors or the highest paid
individual (including directors and employees) as an inducement to join or upon joining the Group
or as compensation for loss of office. None of the directors has waived any emoluments during the
year.
10.
INCOME TAX EXPENSE
Current tax:
PRC Enterprise Income Tax
Hong Kong Profits Tax
Other jurisdictions
Underprovision in prior years
PRC Enterprise Income Tax
Hong Kong Profits Tax
2013
US$’000
2012
US$’000
11,049
39
6
7,846
6
11,094
7,852
11
-
1
11
1
Deferred taxation (note 20):
- Current year
(3,031)
1,502
Taxation charge for the year
8,074
9,355
The provision for PRC Enterprise Income Tax is based on the estimated taxable income for PRC
taxation purposes at the rate of taxation applicable for the year.
Under the Law of the People’s Republic of China on Enterprise Income Tax (the “EIT Law”) and
Implementation Regulation of the EIT Law, the tax rate of the PRC subsidiaries is 25%.
- 75 -
Annual Report 2013
10.
INCOME TAX EXPENSE - continued
Pursuant to relevant laws and regulation, 常德康哲醫藥有限公司 (Changde Kangzhe Pharmaceutical
Co., Ltd.) (“Kangzhe Changde”) was eligible for certain tax concession in the PRC and such tax
concession was subject to renewal by the relevant tax bureau annually. Changde Kangzhe was
entitled to a reduced tax rate of 15% as approved by the relevant local tax authority in 2012. No tax
concession is granted to Changde Kangzhe in 2013 and the applicable tax rate is 25%.
Starting from 1 January 2009, 天津康哲醫藥科技發展有限公司 (Tianjin Kangzhe Pharmaceutical
Technology Development Co., Ltd.) ("Kangzhe Tianjin") is entitled to a reduced tax rate of 15%
granted by the local tax authority until 31 March 2015. 廣 西 康 哲 廣 明 藥 業 有 限 公 司 (Guangxi
Kangzhe Guangming Pharmaceutical Co., Ltd.) ("Kangzhe Guangming") is entitled to reduced tax
rate of 15% for 10 years, starting from 1 January 2011.
Pursuant to EIT Law, enterprises engaged in prescribed agriculture projects are exempted from
EIT. In 2013, the newly established subsidiary, 湖 南 康 哲 農 牧 業 發 展 有 限 公 司 (Hunan Kangzhe
Agricultural Development Co., Ltd.) (“Kangzhe Agricultural”) is eligible for such tax concession.
Pursuant to the Labuan Offshore Business Activity Tax Act 1990 (“Labuan Tax Act”) in Malaysia,
CMS Pharmaceutical Agency Co., Ltd. (“CMS Pharmaceutical Agency”) is eligible to elect to pay
a lump sum taxation charge of MYR 20,000 (equivalent to approximately US$6,000) or 3% on net
audited profits. For the years ended 31 December 2013 and 2012, CMS Pharmaceutical Agency
elected to pay a lump sum tax.
Hong Kong Profits Tax is calculated at 16.5% of the estimated assessable profit in 2013 and there
was no estimated assessable profit in 2012.
The taxation for the year can be reconciled to the profit before taxation per the consolidated
statements of profit or loss and other comprehensive income as follows:
Profit before taxation
Tax at the applicable tax rate (note)
Tax effect of share of result of an associate
Tax effect of expenses that are not deductible in determining
taxable profit
Tax effect of income that is not taxable in determining
taxable profit
Tax effect of tax losses not recognised
Tax effect of deductible temporary differences not recognised
Tax effect of tax concession
Effect on different applicable tax rates of subsidiaries
Effect of tax benefit arising from Labuan Tax Act
Underprovision in prior years
Utilisation of tax loss previously not recognised
(Release of) deferred tax arising from withholding tax on
undistributed profit of a PRC subsidiary
Others
Taxation charge for the year
2013
US$’000
2012
US$’000
110,751
94,483
27,688
(21)
23,621
(15)
1,923
1,343
(416)
278
5,270
(2,903)
(276)
(20,768)
11
(203)
(392)
308
(3,703)
(67)
(11,893)
1
-
(2,412)
(97)
98
54
8,074
9,355
Note: The applicable PRC Enterprise Income Tax rate of 25% (2012: 25%) is the prevailing tax
rate applicable to Shenzhen Kangzhe Pharmaceutical Co., Ltd. (“Kangzhe Shenzhen”), a
major operating subsidiary of the Group.
- 76 -
Annual Report 2013
11.
PROFIT FOR THE YEAR
2013
US$’000
2012
US$’000
184
416
14
184
332
19
Other staff costs
Pension costs
Key employee benefit expense (note 36)
614
30,268
2,222
426
535
23,169
1,474
665
Total staff costs
33,530
25,843
281
58
932
235
1,752
4,148
158,196
1,291
252
(134)
1,599
103
1,285
3,923
109,838
1,144
2013
US$’000
2012
US$’000
20,236
15,575
18,690
12,879
38,926
28,454
20,839
18,690
Profit for the year has been arrived at after charging
(crediting):
Directors’ remuneration
Fees
Other emoluments
Pension costs
Auditor’s remuneration
Allowance for (reversal of) bad and doubtful debts
Allowance for inventories
Release of prepaid lease payments
Depreciation of property, plant and equipment
Amortisation of intangible assets (included in cost of goods sold)
Cost of inventories recognised as an expense
Minimum lease payment under operating lease in respect of property
12.
DIVIDENDS
Dividend paid
Dividend recognised as distribution during the year:
2013 Interim - US$0.00838 (2012: 2012 interim dividend
US$0.00645) per share on 2,414,747,512
(2012: 2,414,747,512) shares
2012 Final - US$0.00774 (2012: 2011 final dividend
US$0.008) per share on 2,414,747,512
(2012: 1,609,831,675) shares
Dividend proposed
Dividend proposed during the year:
2013 final - US$0.00863 (2012: 2012 final dividend of
US$0.00774) per share on 2,414,747,512
(2012: 2,414,747,512) shares
The Board of Directors have declared a final dividend of US$0.00863 per ordinary share of par value
of US$0.005 for the year ended 31 December 2013 (2012: US$0.00774 per ordinary share of par
value of US$0.005).
- 77 -
Annual Report 2013
13.
EARNINGS PER SHARE
The calculation of the basic and diluted earnings per share attributable to the owners of the Company
is based on the following data:
Earnings for the purposes of basic and diluted
earnings per share (profit attributable to owners
of the Company)
2013
US$’000
2012
US$’000
102,825
85,039
Number of
ordinary shares
As at 31 December
2013 & 2012
Weighted average number of ordinary shares
for the purpose of basic and diluted earnings per share
2,414,747,512
The Group has no outstanding potential ordinary shares as at 31 December 2013 and 2012 and during
the year ended 31 December 2013 and 2012.
14.
PROPERTY, PLANT AND EQUIPMENT
Buildings
US$’000
COST
At 1 January 2012
Currency realignment
Additions
Disposals
Transfer
Leasehold
improvement
US$’000
Plant and
machinery
US$’000
Motor
vehicles
US$’000
Furniture,
fixtures
and
equipment
US$’000
Construction
in progress
US$’000
Total
US$’000
4,899
12
(6)
16
205
-
4,050
13
866
(160)
-
3,109
8
579
(23)
-
1,583
4
170
(34)
-
683
3
2,130
(16)
14,529
40
3,745
(223)
-
At 31 December 2012
Currency realignment
Acquired on acquisition
of a subsidiary
Additions
Disposals
Transfer
4,921
376
205
6
4,769
202
3,673
113
1,723
54
2,800
267
18,091
1,018
4,553
4,980
791
-
473
3,367
(1,128)
274
1
928
(128)
-
32
179
(42)
-
12,631
(1,065)
5,059
22,085
(1,298)
-
At 31 December 2013
15,621
211
7,957
4,587
1,946
14,633
44,955
DEPRECIATION
At 1 January 2012
Currency realignment
Provided for the year
Eliminated on disposals
1,618
4
284
(3)
205
-
2,643
8
334
(143)
1,295
4
509
(10)
1,044
3
158
(31)
-
6,805
19
1,285
(187)
At 31 December 2012
Currency realignment
Provided for the year
Eliminated on disposals
1,903
66
473
-
205
6
-
2,842
87
506
(576)
1,798
61
617
(103)
1,174
37
156
(37)
-
7,922
257
1,752
(716)
At 31 December 2013
CARRYING VALUES
At 31 December 2013
2,442
211
2,859
2,373
1,330
-
9,215
13,179
-
5,098
2,214
616
14,633
35,740
At 31 December 2012
3,018
-
1,927
1,875
549
2,800
10,169
- 78 -
Annual Report 2013
14.
PROPERTY, PLANT AND EQUIPMENT - continued
The property, plant and equipment are depreciated over their estimated useful lives as follows:
Buildings
Leasehold improvement
Plant and machinery
Motor vehicles
Furniture, fixtures and equipment
15.
Over the shorter of the lease terms, or 4.50%
Over the shorter of the lease terms, or 4.50%
9% - 18%
18%
18%
PREPAID LEASE PAYMENTS
2013
US$’000
2012
US$’000
10,104
4,519
255
9,849
79
4,440
10,104
4,519
The Group’s prepaid lease payments comprise:
Leasehold land in the PRC:
Medium-term leases
Analysed for reporting purposes as:
Current asset (included in trade and other receivables)
Non-current asset
The Group has pledged leasehold land with a net book value of approximately RMB18,289,000
(equivalent to approximately US$3,000,000) (2012: RMB18,687,000, equivalent to approximately
US$2,973,000) to secure general banking facilities granted to the Group.
16.
INTEREST IN AN ASSOCIATE
Cost of unlisted investments in an associate
Share of post-acquisition profits and other comprehensive
income, net of dividends received
2013
US$’000
2012
US$’000
1,687
1,687
(653)
(514)
1,034
1,173
As at 31 December 2013 and 2012, the details of the associate are as follows:
Name of associate
Place of
establishment/
incorporation
Attributable
equity interest
held by the Group
Ophol Limited (“Ophol”)
Hong Kong
24.49%
- 79 -
Principal activities
Investment holding and
provision of agency
service
Annual Report 2013
16.
INTEREST IN AN ASSOCIATE - continued
Summarised financial information of an associate
Summarised financial information in respect of the Group’s associate is set out below. The
summarised financial information below represents amounts shown in the associate’s financial
statements prepared in accordance with IFRSs.
The associate is accounted for using the equity method in these consolidated financial statements.
Ophol Limited
2013
US$’000
2012
US$’000
724
690
3,501
4,102
(2)
(2)
2013
US$’000
2012
US$’000
Turnover
341
244
Profit for the year
337
240
Other comprehensive income for the year
(3)
9
Total comprehensive income for the year
334
249
Dividends received from the associate during the year
221
193
Current assets
Non-current assets
Current liabilities
Reconciliation of the above summarised financial information to the carrying amount of the interest
in the associate recognised in the consolidated financial statements.
Net assets of Ophol Limited
Proportion of the Group’s ownership interest in Ophol Limited
Carrying amount of the Group’s interest in Ophol Limited
- 80 -
2013
US$’000
2012
US$’000
4,223
24.49%
4,790
24.49%
1,034
1,173
Annual Report 2013
17.
INTANGIBLE ASSETS
Exclusive
distribution
rights
US$’000
(Note a(i)
& Note c(i))
Exclusive
agency
right
US$’000
(Note b)
Patent
rights
US$’000
(Note c(i))
Total
US$’000
7,920
24
5,244
7,403
-
24,440
60
-
39,763
84
5,244
At 31 December 2012
Exchange adjustments
Additions (note c(ii))
Acquired on acquisition of
a subsidiary (note c(iii))
Adjustment arising on acquisition
of interest in intangible assets from
shareholders of non-controlling interests
13,188
410
-
7,403
-
24,500
834
5,928
45,091
1,244
5,928
-
-
2,549
2,549
-
-
(620)
(620)
At 31 December 2013
13,598
7,403
33,191
54,192
AMORTISATION
At 1 January 2012
Exchange adjustments
Charge for the year
2,041
5
1,707
2,792
740
1,102
4
1,476
5,935
9
3,923
At 31 December 2012
Exchange adjustments
Charge for the year
Adjustment arising on acquisition
of interest in intangible assets from
shareholders of non-controlling interests
3,753
144
1,730
3,532
740
2,582
107
1,678
9,867
251
4,148
-
-
(97)
(97)
At 31 December 2013
5,627
4,272
4,270
14,169
CARRYING VALUES
At 31 December 2013
7,971
3,131
28,921
40,023
At 31 December 2012
9,435
3,871
21,918
35,224
COST
At 1 January 2012
Exchange adjustments
Additions (note a(ii))
- 81 -
Annual Report 2013
17.
INTANGIBLE ASSETS - continued
(a)
Exclusive distribution right
(i)
On 9 March 2008, the Group entered into an exclusive distribution agreement and
a supplementary agreement (the “XinHuoSu Agreements”) with 西 藏 諾 迪 康 藥 業
服 份 有 限 公 司 (Tibet Rhodiola Pharmaceutical Holding Co., Ltd.) ("Rhodiola") in
connection to a finished drug product (Lyophilized Recombinant Human Brain
Natriuretic Peptide) which was distributed in the PRC market under the trade name
of XinHuoSu for a term of three years with effect from 1 July 2008 to 30 June 2012.
Pursuant to the XinHuoSu Agreements, the Group obtained the exclusive
distribution right of XinHuoSu for nil consideration and committed to handle the
Phase IV clinical trials of XinHuoSu for 2,000 cases in the PRC to meet the drug
safety standards set by the Food and Drug Administration in the PRC ("SFDA").
The drug, XinHuoSu, to be used in the 2,000 case clinical trials would be provided
by Rhodiola free of charge. All other costs of the 2,000 case clinical trials should
be borne by the Group. The management of the Group estimated the total costs to
be incurred for completion of the 2,000 case clinical trials would be approximately
RMB6,500,000 (equivalent to approximately US$919,000).
In the opinion of the directors of the Company, the Group obtained the exclusive
distribution right of XinHuoSu on the basis that the Group should complete the
clinical trials of XinHuoSu and would bear all the costs of the clinical trials.
Therefore, the costs to be incurred in clinical trials of US$919,000 were capitalised
as an intangible asset.
As at 31 December 2011, the exclusive distribution right was fully amortised.
(ii)
On 23 August 2012, the Group entered into a product rights transfer agreement (the
"Agreement") with 北京亞東生物製藥有限公司 (Beijing Yadong Biopharmaceutical
Co., Ltd.) ("Beijing Yadong"), an independent third party. According to the
Agreement, Kangzhe Tianjin purchased from Beijing Yadong the exclusive
distribution rights of three Traditional Chinese Medicinal Products - Yin Lian Qing
Gan Ke Li, Xiang Fu Yi Xue Kou Fu Ye, Ma Jiang Jiao Nang (collectively referred
to as "Three Products") for a term of 20 years with effect from 23 August 2012 at
a consideration of RMB33,000,000 (equivalent to approximately US$5,244,000).
Tianjin Kangzhe will exclusively promote and sell the Three Products in the PRC
and Beijing Yadong will be responsible for the production of the Three Products
as required by Tianjin Kangzhe and sell the Three Products exclusively to Tianjin
Kangzhe.
The exclusive distribution rights are amortised over their expected useful lives of 20 years.
- 82 -
Annual Report 2013
17.
INTANGIBLE ASSETS - continued
(b)
Exclusive agency right
On 26 April 2008, a transfer agreement was entered into between Ophol, Qingdao League
and Pharma Stulln GmbH (“Pharma”), the supplier of Augentropfen Stulln Mono (“Stulln”)
in Germany in connection to the transfer of the exclusive agency right of Stulln in the PRC
from Qingdao League to Ophol at nil consideration. After Ophol has obtained the exclusive
agency right of Stulln in the PRC, Ophol agreed to transfer such exclusive agency right to
the Group on condition that the 51% equity interest of Qingdao League owned by Kangzhe
Shenzhen would be transferred to Qingdao Leatu Trading Ltd., a company which has
common shareholder with Ophol under the sale and purchase agreement. On 15 July 2008,
the Group entered into a supplementary agreement with Ophol and Pharma in connection
to the transfer of exclusive agency right of Stulln, from Ophol to CMS Pharmaceutical
Agency, a wholly-owned subsidiary of the Company, at a consideration of RMB60,000,000
(equivalent to approximately US$8,779,000). CMS Pharmaceutical Agency will pay
annually of RMB6,000,000 (equivalent to approximately US$878,000) to Ophol over the
next ten years to settle the consideration. The directors of the Group recognised the payable
as a deferred consideration (see note 26) in the amount of US$6,775,000, which represents
the present value of the annual consideration of US$878,000 over next 10 years discounted
at 5%. CMS Pharmaceutical Agency has replaced Qingdao League as the exclusive agent of
Stulln for Pharma in the PRC from 1 August 2008 to 31 July 2018.
The expected useful life of the exclusive agency right is 10 years.
(c)
Acquisition of exclusive distribution rights and patent rights
(i)
The Group acquired 100% of equity interest in Great Move Enterprises Limited
(“Great Move”) and 51% of equity interest in Kangzhe Guangming on 3 April
2011 and 30 April 2011, respectively. This included the acquisition of exclusive
distribution rights and patent rights for the sales of several products. The exclusive
distribution rights and patent rights were measured at their fair values at the date
of acquisition and the valuation of the intangible assets is performed by Vigers
Appraisal & Consulting Limited, an independent valuer.
The fair value of the patent rights at the date of acquisition was determined based
on the royalty rate method by capitalising future royalty income which a market
participant would be willing to pay to use the patents for the remaining term of
the patent right. The fair value of the exclusive distribution rights at the date of
acquisition was determined based on the multi-period excess earnings method by
capitalising future cashflows derived from the intangible assets for the remaining
term of the distribution rights.
As at the acquisition date, the major patent rights owned by Kangzhe Tianjin, the
wholly owned subsidiary of Great Move, represented YiNuoShu and ShaDuoLiKa
amounting to US$21,035,000 and US$1,264,000, respectively and the exclusive
distribution rights owned by Kangzhe Tianjin amounted to US$6,002,000. The
Group also acquired the exclusive distribution right and patent right of XiDaKang
amounting to US$894,000 and US$1,199,000, respectively through the acquisition
of Kangzhe Guangming.
The expected useful lives of the exclusive distribution rights and patent rights are
ranging from 1 year to 17 years.
- 83 -
Annual Report 2013
17.
INTANGIBLE ASSETS - continued
(c)
Acquisition of exclusive distribution rights and patent rights - continued
(ii)
On 27 December 2013, the Group entered into a transfer agreement with the
shareholders of non-controlling interests of Kangzhe Guangming (the “Sellers”)
in connection to the transfer of the patent right of XiDaKang at a consideration
of RMB40,000,000 (equivalent to approximately US$6,561,000). The Sellers,
who directly hold 49% equity interest of Kangzhe Guangming, agreed to transfer
the 49% interest in the patent right of XiDaKang to Kangzhe (Hunan) Medical
Co., Ltd. (“Kangzhe Hunan”), a wholly-owned subsidiary of the Company. The
consideration will be settled by the first payment of RMB30,000,000 (equivalent to
approximately US$4,920,000) and annual payment of RMB1,000,000 (equivalent
to approximately US$164,000) to the Sellers over the next ten years. The directors
of the Group recognised the payable as a deferred consideration payable (see note
26) in the amount of US$1,008,000, which represents the present value of the annual
consideration of US$164,000 over next ten years discounted at 10%. Pursuant
to the transfer agreement, the 51% interest in the patent right of XiDaKang is
also transferred from Kangzhe Guangming to Kangzhe Hunan. Starting from 27
December 2013, Kangzhe Hunan has replaced Kangzhe Guangming as the patent
right owner of XiDaKang.
As at 31 December 2013, the expected remaining useful life of the patent right is 14
years.
(iii)
The Group acquired 100% of equity interest in Kangzhe Lengshuijiang
Pharmaceutical Co., Ltd. (formerly known as Sinopharm Traditional Chinese
Medicine Lengshuijiang Pharmaceutical Co., Ltd.) (“Kangzhe Lengshuijiang”) on
28 February 2013. This included the acquisition of the patent right of GanFuLe.
The patent right was measured at their fair values at the date of acquisition and the
valuation of the intangible assets is performed by Vigers Appraisal & Consulting
Limited, an independent valuer.
The fair value of the patent right at the date of acquisition was determined based
on the royalty rate method by capitalising future royalty income which a market
participant would be willing to pay to use the patents for the remaining term of the
patent right.
As at the acquisition date, the patent right owned by Kangzhe Lengsuijiang,
represented GanFuLe, amounted to US$2,549,000.
The expected useful live of the patent right is 11 years.
- 84 -
Annual Report 2013
18.
GOODWILL
US$’000
COST
At 1 January 2012 and 31 December 2012
Arising on acquisition of a subsidiary (note 31)
178,634
3,392
At 31 December 2013
182,026
IMPAIRMENT
At 1 January 2012 and 31 December 2012
Impairment loss recognised in the year
1,277
At 31 December 2013
1,277
CARRYING VALUES
At 31 December 2013
180,749
At 31 December 2012
178,634
For the purposes of impairment testing, the entire amount of goodwill has been allocated to four
(2012: three) CGUs, representing four subsidiaries, namely Kangzhe Tianjin, Kangzhe Lengshuijiang,
Kangzhe Guangming and Sky United Trading Limited (“Sky United”) (2012: Kangzhe Tianjin,
Kangzhe Guangming and Sky United). Kangzhe Tianjin and Sky United are engaged in marketing,
promotion and sale of drugs and trading of drugs, respectively. Kangzhe Lengshuijiang and Kangzhe
Guangming are engaged in production of medicines. The relevant intangible assets (excluding
exclusive agency right of US$3,131,000 and patent right of XiDaKang of US$6,473,000) (2012:
excluding exclusive agency right of US$3,871,000) (the “relevant intangible assets”) are allocated
to the CGUs. The carrying amounts of goodwill (net of accumulated impairment losses) and the
relevant intangible assets as at 31 December 2013 and 2012 allocated to these units are as follows:
Goodwill
Kangzhe Tianjin
Kangzhe Lengshuijiang
Sky United
Kangzhe Guangming
Intangible assets
2013
2012
US$’000
US$’000
2013
US$’000
2012
US$’000
176,978
3,392
379
-
176,978
379
1,277
27,980
2,439
-
29,471
1,882
180,749
178,634
30,419
31,353
The recoverable amounts of Kangzhe Tianjin, Kangzhe Lengshuijiang and Sky United are determined
based on value in use calculations. As at 31 December 2013 and 2012, the recoverable amount of
Kangzhe Guangming has been determined based on fair value less costs to sell and value in use
calculations, respectively (see below). The key assumptions for the value in use calculations are
those regarding the discount rates, growth rates and expected changes to selling prices and direct costs
during the year. Management estimates discount rates using pre-tax rates that reflect current market
assessments of the time value of money and the risks specific to the CGUs. The growth rates are based
on industry growth forecasts. Changes in selling prices and direct costs are based on past performance
and expectations of future changes in the market.
- 85 -
Annual Report 2013
18.
GOODWILL - continued
Kangzhe Tianjin
At 31 December 2013, the impairment review is determined based on cash flow projections which
was derived from the financial budgets approved by management covering a three-year period, and
discount rate of 11% (2012: 10%). Kangzhe Tianjin’s cash flows beyond the third-year period are
extrapolated using a steady growth rate ranging from 0% to 10% (2012: 0% to 10%). This growth
rate is based on the relevant industry growth forecasts and does not exceed the average long-term
growth rate for the relevant industry.
Kangzhe Lengshuijiang
At 31 December 2013, the impairment review is determined based on cash flow projections which
was derived from the financial budgets approved by management covering a three-year period,
and discount rate of 11%. Kangzhe Lengshuijiang’s cash flows beyond the third-year period are
extrapolated using a declining growth rate from 20% to 10%. This growth rate is based on the
relevant industry growth forecasts and does not exceed the average long-term growth rate for the
relevant industry.
Kangzhe Guangming
At 31 December 2012, the impairment review was determined based on cash flow projections which
was derived from the financial budgets approved by management covering a three-year period, and
discount rate of 10%. For impairment review purpose, the cash flow projection was extrapolated for
ten years based on the assumption that a growth rate of 10% was expected after the third year. This
growth rate was based on the relevant industry growth forecasts and did not exceed the average longterm growth rate for the relevant industry. Due to the synergetic effect from business combination,
management of the Group believed that the growth rate was reasonable.
On 31 December 2013, the Group had entered into a shares transfer agreement with an independent
third party, 廣州市康迪爾醫藥有限公司 , to dispose of the subsidiary, Kangzhe Guangming, which is
engaged in manufacture of XiDaKang, for a net consideration of RMB12,000,000 (approximately
US$1,968,000). Up to the date of approval for issuance of the consolidated financial statements, the
disposal still has not been completed.
The management is of the opinion that the value in use calculation is not an appropriate basis for
the determination of the recoverable amount of Kangzhe Guangming as at 31 December 2013 due
to the disposal of the subsidiary. As at 31 December 2013, the recoverable amount of Kangzhe
Guangming was determined based on fair value less costs to sell calculations, determined using the
net consideration received from 廣州市康迪爾醫藥有限公司 , subsequent to the reporting period.
The Group therefore recognised an impairment loss of approximately US$1,277,000 (2012: nil) in
relation to goodwill arising on acquisition of Kangzhe Guangming in current year.
The intangible assets previously allocated to Kangzhe Guangming, for the purpose of impairment
testing in 2012, are transferred to Kangzhe Hunan, which has replaced Kangzhe Guangming as the
owner of the intangible assets of XiDaKang and engaged in production of XiDaKang starting from
27 December 2013. At the end of the reporting period, management reviews the carrying amounts
of the these intangible assets with finite useful lives and determines there is no indication that these
assets have suffered an impairment loss.
- 86 -
Annual Report 2013
19.
AVAILABLE-FOR-SALE INVESTMENTS
Listed investments
Equity securities listed in Shanghai Stock Exchange
2013
US$’000
2012
US$’000
20,288
16,374
The investment is denominated in RMB and its fair value is based on the quoted market prices.
During the year ended 31 December 2013, change in fair value of US$3,356,000 (2012:
US$2,718,000) was recognised in other comprehensive income.
20.
DEFERRED TAX
The following are the deferred tax assets (liabilities) recognised and movements thereon during the
current and prior years:
Fair value
adjustments
Undistributed to assets
Unrealised
profits
acquired
profits on
of PRC
in business
inventories subsidiary combinations
US$’000 US$’000
US$’000
At 1 January 2012
Credit (charge) to profit
or loss for the year (note 10)
Charge to other comprehensive
income for the year
Exchange differences
Fair value
gain on
availablefor-sale Others
investments (note)
Total
US$’000 US$’000 US$'000
4,599
(2,314)
(2,275)
-
89
99
(1,697)
(98)
325
-
-
-
(5)
(631)
(1)
-
(631)
(6)
At 31 December 2012
Acquisitions
Credit (charge) to profit
or loss for the year (note 10)
Charge to other comprehensive
income for the year
Adjustment arising on acquisition of
interest in intangible assets from
shareholders of non-controlling interests
Exchange differences
2,902
-
(2,412)
-
(1,955)
(1,648)
(632)
-
57
-
(2,040)
(1,648)
261
2,412
387
-
(29)
3,031
-
-
-
(764)
-
(764)
-
-
47
(103)
(31)
1
47
(133)
At 31 December 2013
3,163
-
(3,272)
(1,427)
29
(1,507)
(32) (1,502)
Note: These mainly represent the deferred tax assets recognised in relation to impairment loss on
plant and machinery used for production of medicines for the year ended 31 December 2009.
The following is the analysis of the deferred tax balances for financial reporting purposes:
Deferred tax assets
Deferred tax liabilities
- 87 -
2013
US$’000
2012
US$’000
3,192
(4,699)
2,959
(4,999)
(1,507)
(2,040)
Annual Report 2013
20.
DEFERRED TAX - continued
At 31 December 2013, the Group had unused tax losses of approximately US$3,357,000 (2012:
US$3,062,000) available for offsetting against future profits, including an unused tax loss of
approximately US$815,000 arising on acquisition of a subsidiary during the year ended 31
December 2013. No deferred tax asset has been recognised in respect of such tax losses due to the
unpredictability of future profit streams. Included in unrecognised tax losses at 31 December 2013
are tax losses of approximately US$1,698,000 (2012: US$546,000) that will be expired within 5
years from the year of originating. Other tax losses may be carried forward indefinitely. During the
year ended 31 December 2013, tax losses of approximately US$529,000 (2012: US$912,000) was
expired.
As at 31 December 2013, the Group had deductible temporary differences associated with unrealised
profits on inventories of US$33,815,000 (2012:US$11,572,000) available for offsetting against future
profits. A deferred tax asset has been recognised in respect of US$12,734,000 (2012: U$11,572,000)
of such deductible temporary difference. No deferred tax asset has been recognised in respect of the
remaining US$21,081,000 (2012: nil) as it is not probable that taxable profit will be available against
which the deductible temporary differences can be utilised.
Under the EIT Law of PRC, withholding tax is imposed on dividends declared in respect of profits
earned by the PRC subsidiary, from 1 January 2008 onwards. As at 31 December 2012, deferred
taxation had been provided for in the consolidated financial statements in respect of temporary
differences attributable to accumulated profits of Kangzhe Shenzhen amounting to US$48,240,000.
As at 31 December 2013, the Directors of Company is in an opinion that Kangzhe Shenzhen will not
declare any dividends in respect of its accumulated profits. The Group is able to control the timing
of reversal of the temporary differences of Kangzhe Shenzhen and it is probable that the temporary
difference will not reverse in the foreseeable future starting from the year ended 31 December 2013.
The deferred taxation of US$2,412,000 has been released in the year ended 31 December 2013.
Deferred taxation has not been provided for in the consolidated financial statements in respect of
temporary differences attributable to accumulated profits of the PRC subsidiaries amounting to
US$155,225,000 (2012: US$69,124,000) as the Group is able to control the timing of the reversal
of the temporary differences and it is probable that the temporary differences will not reverse in the
foreseeable future.
21.
INVENTORIES
Raw materials
Work in progress
Finished goods
- 88 -
2013
US$’000
2012
US$’000
1,839
562
25,000
718
300
14,470
27,401
15,488
Annual Report 2013
22.
TRADE AND OTHER RECEIVABLES
2013
US$’000
2012
US$’000
Trade receivables
Less: Allowance for bad and doubtful debts
62,568
(256)
50,536
(191)
Bills receivables
Purchase prepayment
Other receivables and deposits
62,312
26,041
38,735
13,804
50,345
28,714
5,721
8,111
140,892
92,891
Total trade and other receivables
The Group normally allows a credit period ranging from 0 to 90 days to its trade customers, but
longer credit period up to four months was allowed to some selected customers.
An aging analysis of the trade receivables (net of allowance for bad and doubtful debts) presented
based on the invoice date at the respective reporting period, which approximated the respective
revenue recognition date is as follows:
0 - 90 days
91 - 365 days
Over 365 days
2013
US$’000
2012
US$’000
58,784
3,378
150
47,772
2,480
93
62,312
50,345
The bills receivables of the Group are of the age within six months at the end of the reporting period.
Management closely monitors the credit quality of trade and other receivables and considers the
trade and other receivables that are neither past due nor impaired to be of a good credit quality.
Included in the Group’s trade receivables balance are debtors with aggregate carrying amount of
US$8,011,000 (2012: US$5,125,000) which are past due at the reporting date for which the Group
has not provided for impairment loss. Based on the historical experiences of the Group, trade
receivables past due but not impaired are generally recoverable. The Group does not hold any
collateral over these balances.
- 89 -
Annual Report 2013
22.
TRADE AND OTHER RECEIVABLES - continued
The following is an aging analysis of trade receivables which are past due but not impaired:
0 - 90 days
91 - 365 days
Over 365 days
2013
US$’000
2012
US$’000
5,537
2,324
150
3,492
1,540
93
8,011
5,125
The Group has provided full impairment for receivables that aged over 3 years from invoice date
because historical experience is such that receivables that are past due beyond 3 years are generally
not recoverable.
Movement in the allowance for bad and doubtful debts:
2013
US$’000
2012
US$’000
Balance at beginning of the reporting period
Impairment losses (reversal) recognised on receivables
Amount written off as uncollectible
Currency realignment
191
58
7
331
(134)
(7)
1
Balance at end of the reporting period
256
191
Included in the allowance for bad and doubtful debts are individually impaired trade receivables
with an aggregate balance of US$256,000 (2012: US$191,000) which have either been placed under
liquidation or in severe financial difficulties. The Group does not hold any collateral over these
balances.
23.
PLEDGED BANK DEPOSITS/BANK BALANCES AND CASH
The bank deposits and pledged bank deposits carry interest at the prevailing market rate of
approximately 0.50% to 4.90% (2012: 0.50% to 5.55%) per annum.
The pledged bank deposits amounting to US$73,485,000 (2012: US$73,261,000) represent deposits
pledged to banks to secure the issuance of letters of credit. Therefore the pledged bank deposits are
classified as current assets.
Included in bank balances are the following amounts denominated in currencies other than functional
currency of the relevant group entities:
US$
Euro (“EURO”)
Hong Kong dollars (“HK$”)
RMB
- 90 -
2013
US$’000
2012
US$’000
161
957
74
5
108
15
15
-
Annual Report 2013
24.
TRADE AND OTHER PAYABLES
An aging analysis of the trade payables presented based on the invoice date at the end of the
reporting period as follows:
2013
US$’000
2012
US$’000
0 - 90 days
91 - 365 days
Over 365 days
10,882
54
194
9,212
324
106
Payroll and welfare payables
Other tax payables
Amount due to shareholders of non-controlling interests
Other payables and accruals
11,130
8,311
2,203
4,920
13,571
9,642
5,825
1,555
8,153
40,135
25,175
The credit period on purchases of goods is ranging from 0 to 120 days.
Amount due to shareholders of non-controlling interests is unsecured, interest free and repayable on
demand.
Included in trade and other payables are the following amounts denominated in currency other than
functional currency of the relevant group entities:
EURO
RMB
25.
2013
US$’000
2012
US$’000
527
4,920
-
2013
US$’000
2012
US$’000
51,521
64,845
SECURED bank BORROWINGS
Advanced from banks on discounted bills receivables
with recourse - repayable within one year
As at 31 December 2013, the Group discounted bills receivable of US$51,521,000 (2012:
US$64,845,000) to banks for cash proceeds of US$51,521,000 (2012: US$64,845,000). If the bills
receivables are not paid at maturity, the banks have the right to request the Group to pay the unsettled
balance. The receivables are arising from intra-group transactions which have then been fully
eliminated on consolidation. The borrowings carried fixed interest at a range from 3.30% to 3.60%
(2012: 3.25% to 3.38%) per annum.
- 91 -
Annual Report 2013
26.
DEFERRED CONSIDERATION PAYABLES
Non-current
Current
2013
US$’000
2012
US$’000
3,568
940
3,357
812
4,508
4,169
During the year ended 31 December 2008, the Group acquired an agency right from Ophol which
has become the associate of the Group during the year ended 31 December 2009 for a consideration
of RMB60,000,000 (equivalent to approximately US$8,779,000) (see note 17(b)). The consideration
is payable annually of RMB6,000,000 (equivalent to approximately US$878,000) for 10 years
commencing on 26 April 2008. The present value of the discounted consideration determined based
on a discount rate of 5% amounting to US$6,775,000 was accounted for by the Group as deferred
consideration payable at initial recognition. As at 31 December 2013, the carrying value amounting
to US$3,500,000 (2012: US$4,103,000) is included in deferred consideration payables.
As at 31 December 2012, the deferred consideration payables of US$66,000 (2013: nil) represented
consideration for the acquisition of an associate, Ophol.
During the year ended 31 December 2013, the Group acquired 49% interest in the patent right of
XiDaKang for a consideration of RMB40,000,000 (equivalent to approximately US$6,561,000) (see
note 17(c) (ii)). In addition to the first payment of RMB30,000,000 (equivalent to approximately
US$4,920,000), the consideration is payable annually of RMB1,000,000 (equivalent to approximately
US$164,000) for 10 years commencing on 27 December 2014. The present value of the discounted
consideration determined based on a discount rate of 10% amounting to US$1,008,000 was
accounted for by the Group as deferred consideration payable at initial recognition. As at 31
December 2013, the carrying value amounting to US$1,008,000 is included in deferred consideration
payables.
27.
SHARE CAPITAL
Number of
shares
’000
Amount
US$’000
20,000,000
100,000
At 1 January 2012
Bonus issue (note)
1,609,831
804,916
8,049
4,025
At 31 December 2012 and 31 December 2013
2,414,747
12,074
Authorised share capital:
At 31 December 2012 and 31 December 2013
Issued and fully paid:
Note: On 27 April 2012, the bonus issue has been distributed on the basis of 1 bonus share for
every 2 shares held. Upon the exercise of the bonus issue, the bonus issue was credited as
fully paid by way of capitalisation of an amount in the share premium account. Accordingly,
804,915,838 bonus shares were issued under the bonus issue.
All the shares which were issued by the Company during the year ended 31 December 2012 rank
pari passu with each other in all respects.
- 92 -
Annual Report 2013
28.
RESERVES
Capital reserve
Capital reserve resulted from transactions between the Group and its shareholders. It mainly
represents equity shares of Kangzhe Shenzhen granted by Mr. Lam Kong, a director and former
shareholder of Kangzhe Shenzhen, to certain employees for their services rendered in prior year,
rights granted by Mr. Lam Kong to certain employees to receive cash at a pre-determined formula
for their services rendered in prior year, waiver of an advance to the Company by Mr. Lam Kong
in 2006, discount on acquisitions of additional interest in subsidiaries from Mr. Lam Kong in 2004
and 2005, the difference between the transfer of the entire interest in Kangzhe Shenzhen to Sino
Talent Limited (“Sino Talent”) pursuant to the group restructuring in 2005 and the nominal value
of Kangzhe Shenzhen’s share capital, and difference between the par value of shares issued by the
Company for the entire interest in CMS International Limited (“CMS International”) and Healthlink
Consultancy Inc. (“Healthlink”) pursuant to the group reorganisation in 2006 and the nominal value
of the issued share capital of CMS International and Healthlink in preparation for the listing of the
Company’s shares. The balance was reduced by the capitalisation issue in 2007. The equity shares
and rights granted by Mr. Lam Kong to certain employees had been terminated on or before 2006.
On 19 April 2010, the Group acquired additional interest in Sky United. An amount of US$2,221,000,
representing the excess of the fair value of the new ordinary shares issued by the Company over the
decrease in the carrying value of the non-controlling interest is charged to capital reserve.
During the year ended 31 December 2010, a deemed distribution to a shareholder in respect of
expenses incurred for a shareholder during the initial public offering exercise by the Company.
Surplus reserve fund
Articles of Association of the Group’s subsidiaries established in the PRC require the appropriation
of certain percentage of their profit after taxation each year to the surplus reserve fund until the
balance reaches 50% of the registered capital of the relevant subsidiaries. In normal circumstances,
the surplus reserve fund shall only be used for making up losses, capitalisation into registered capital
and expansion of the subsidiaries’ production and operation. For the capitalisation of surplus reserve
fund into registered capital, the remaining amount of such reserve shall not be less than 25% of the
registered capital.
29.
CAPITAL RISK MANAGEMENT
The Group manages its capital to ensure that the group entities will be able to continue as a going
concern while maximising the return to stakeholders through the optimisation of the debt and equity
balance. The Group’s overall strategy remains unchanged from prior year.
The capital structure of the Group consists of cash and cash equivalents, bank borrowings and equity
attributable to owners of the Company, comprising issued share capital and reserves including
accumulated profits.
The directors of the Company review the capital structure on a regular basis. As part of this review,
the directors consider the cost of capital and the risks associated with each class of capital. Based
on recommendations of the directors, the Group will balance its overall capital structure through the
payment of dividends and new share issues.
- 93 -
Annual Report 2013
30.
FINANCIAL INSTRUMENTS
Categories of financial instruments
2013
US$’000
2012
US$’000
Financial assets
Loans and receivable (including cash and cash equivalents)
Available-for-sale investments
241,869
20,288
259,482
16,374
Financial liabilities
Others financial liabilities measured at amortised cost
(75,839)
(82,099)
Financial risk management objectives and policies
The Group’s major financial instruments include available-for-sale investments, trade and other
receivables, pledged bank deposits, bank balances and cash, trade and other payables, secured bank
borrowings and deferred consideration payables. Details of these financial instruments are disclosed
in the respective notes. The risks associated with these financial instruments include market risk
(interest rate risk, currency risk and other price risk), credit risk and liquidity risk. The policies
on how to mitigate these risks are set out below. The management manages and monitors these
exposures to ensure appropriate measures are implemented on a timely and effective manner.
Market risk
Interest rate risk
The Group’s fair value interest rate risk is the risk that the fair value of a fixed rate financial
instrument will fluctuate because of changes in market interest rates.
Currency risk
Some subsidiaries of the Company have foreign currency purchases, which also expose the Group
to foreign currency risk. Approximately 22.7% (2012: 21.3%) of the Group’s purchases are
denominated in currencies other than the functional currencies of the group entities making the
purchase. All sales of the Group are denominated in functional currency of the group entities making
the sale. The Group currently has not entered into any foreign currency forward contracts to hedge
against foreign currency risk. Management will consider hedging foreign currency exposure should
the need arise.
- 94 -
Annual Report 2013
30.
FINANCIAL INSTRUMENTS - continued
Financial risk management objectives and policies - continued
Market risk - continued
Currency risk - continued
The carrying amounts of the Group’s foreign currency denominated monetary assets (representing
bank balances) and monetary liabilities (representing trade and other payables and deferred
consideration payables) at the reporting date are as follows:
Assets
US$
EURO
HK$
rmb
2013
US$’000
2012
US$’000
161
957
74
5
108
15
15
-
Liabilities
2013
2012
US$’000
US$’000
527
9,428
4,169
Management conducts periodic review of exposure and settlements of various currencies, and will
consider hedging significant foreign currency exposures should the need arise.
The Group is mainly exposed to currency risk of the US$, Euro, HK$ and RMB. The following
table details the Group’s sensitivity to a 1% (2012: 1%) increase and decrease in the functional
currencies of the relevant group entities against the relevant foreign currencies. The sensitivity
analysis includes only outstanding foreign currency denominated monetary items and adjusts their
translation at the year end for a 1% (2012: 1%) change in foreign currency rates. The sensitivity
analysis includes bank balances, trade and other payables and deferred consideration payables of
which the foreign currency exposures are not hedged with hedging instruments. A positive/negative
number below indicates an increase/decrease in post-tax profit for the year where the functional
currencies of the relevant group entities strengthen 1% (2012: 1%) against the relevant foreign
currencies. If there is a 1% (2012: 1%) weakening in functional currencies of the relevant group
entities against the relevant foreign currencies, there would be an equal and opposite impact on the
result for the year:
RMB (as functional currency of the
relevant group entities) against US$
US$ (as functional currency of the
relevant group entities) against euro
RMB (as functional currency of the
relevant group entities) against HK$
US$ (as functional currency of the
relevant group entities) against RMB
2013
US$’000
2012
US$’000
(2)
(1)
(4)
-
(1)
-
94
42
In management’s opinion, the sensitivity analysis is unrepresentative of the inherent foreign
exchange risk as the year end exposure does not reflect the exposure during the year.
- 95 -
Annual Report 2013
30.
FINANCIAL INSTRUMENTS - continued
Financial risk management objectives and policies - continued
Market risk - continued
Other price risk
The Group’s available-for-sale investments in listed securities are measured at fair value at each
reporting date with reference to the market share prices. Therefore, the Group is exposed to equity
price risk and the management will monitor the price movements and take appropriate actions when
it is required. The Group’s equity price risk is mainly concentrated on equity instruments operating
in pharmaceutical industry sector quoted in the Shanghai Stock Exchange.
The sensitivity analyses below have been determined based on the exposure to equity price risks at
the reporting date. As at 31 December 2013, if the prices of the respective equity instruments had
been 5% higher/lower, investment valuation reserve would increase/decrease by US$783,000 (2012:
US$632,000) as a result of the changes in fair value of available-for-sale investments.
Credit risk
The Group’s maximum exposure to credit risk in the event of the counterparties failure to perform
their obligations as at 31 December 2013 in relation to each class of recognised financial assets is
the carrying amount of those assets as stated in the consolidated statement of financial position.
In order to minimise the credit risk, management of the Group has delegated a team responsible
for determination of credit limits, credit approvals and other monitoring procedures to ensure that
follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable
amount of each individual trade debt at the end of the reporting period to ensure that adequate
impairment losses are made for irrecoverable amounts. In this regard, the directors of the Company
consider that the Group’s credit risk is significantly reduced.
The credit risk on liquid funds is limited because the counterparties are banks with good reputation.
Other than concentration of credit risk on liquid funds which are deposited with several banks with
high credit ratings, the Group has no significant concentration of credit risk on trade and other
receivables, with exposure spread over a number of counterparties and customers and across diverse
geographical areas.
Liquidity risk
In the management of the liquidity risk, the Group monitors and maintains a level of cash and cash
equivalents deemed adequate by the management to finance the Group’s operations and mitigate the
effects of fluctuations in cash flows.
Ultimate responsibility for liquidity risk management rests with the board of directors, which has
built an appropriate liquidity risk management framework for the management of the Group’s short,
medium and long-term funding and liquidity management requirements.
The following table details the Group’s remaining contractual maturity for its non-derivative
financial liabilities based on the agreed repayment terms. The table has been drawn up based on the
undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be
required to pay.
- 96 -
Annual Report 2013
30.
FINANCIAL INSTRUMENTS - continued
Financial risk management objectives and policies - continued
Liquidity risk - continued
The table includes both interest and principal cash flows. To the extent that interest flows are floating
rate, the undiscounted amount is derived from current interest rate at the end of the reporting period.
Weighted Repayable on
average
demand or
interest
less than
rate
1 year
%
US$’000
As at 31 December 2013
Trade and other payables
Deferred consideration payables
Fixed interest rate borrowings
6.12
3.42
1 to 5
years
US$’000
Over
5 years
US$’000
19,810
955
51,521
3,821
-
820
-
19,810
5,596
51,521
19,810
4,508
51,521
72,286
3,821
820
76,927
75,839
Weighted Repayable on
average
demand or
interest
less than
rate
1 year
%
US$’000
As at 31 December 2012
Trade and other payables
Deferred consideration payables
Fixed interest rate borrowings
5.00
3.31
Total
Carrying
undiscounted amount at
cash
31 December
flows
2013
US$’000
US$’000
Total
Carrying
undiscounted amount at
cash
31 December
flows
2012
US$’000
US$’000
1 to 5
years
US$’000
Over
5 years
US$’000
13,085
812
64,845
3,815
-
239
-
13,085
4,866
64,845
13,085
4,169
64,845
78,742
3,815
239
82,796
82,099
Fair value measurements of financial instruments
Fair value of the Group’s financial asset that is measured at fair value on a recurring basis
The Group’s financial asset is measured at fair value at the end of each reporting period. The
following table gives information about how the fair value of this financial asset is determined (in
particular, the valuation technique and input used).
Financial asset
Listed AFS equity investments
Fair value as at
2013
2012
US$’000
US$’000
20,288
16,374
Fair value
hierarchy
Level 1
Valuation technique
and key input
Quoted bid price
in an active market
The directors of the Company consider that the carrying amounts of financial assets and financial
liabilities recorded at amortised cost in the consolidated financial statements approximate their fair
values.
There were no transfers into or out of Level 1 during the year.
- 97 -
Annual Report 2013
31.
ACQUISITION OF A SUBSIDIARY
On 28 February 2013, the Group acquired an 100% interest in Kangzhe Lengshuijiang from an
independent third party. Kangzhe Lengshuijiang is engaged in manufacture of GanFuLe, a traditional
Chinese medicine. The purpose of the acquisition is to acquire the product rights of GanFuLe and
take full advantage of the Group’s existing promotion network.
Consideration transferred
US$’000
Cash
12,918
Assets acquired and liabilities recognised at the date of acquisition were as follows:
US$’000
Property, plant and equipment
Prepaid lease payments
Intangible assets
Bank balances and cash
Trade and other receivables
Inventories
Trade and other payables
Amount due to a shareholder
Deferred tax liabilities
5,059
3,167
2,549
33
398
1,850
(1,882)
(4,834)
(1,648)
4,692
4,834
Shareholder’s receivable assigned to the Group
9,526
In the opinion of the directors of the Company, the fair value of the receivables acquired (which
principally comprised of trade and other receivables) approximated to the gross contractual amounts,
the best estimate at acquisition date of the contractual cash flows of the receivables were expected to
be collected.
Goodwill arising on acquisition
US$’000
Consideration transferred
Less: fair value of identifiable net assets acquired
12,918
(9,526)
3,392
Goodwill arising on acquisition
Goodwill arose in the acquisition of Kangzhe Lengshuijiang was attributable to the synergistic effect
of the promotion network generated from the combination. In addition, the consideration paid for the
acquisition effectively included amounts in relation to the benefit of revenue growth, future market
development and cost control of Kangzhe Lengshuijiang. These benefits were not recognised separately
from goodwill because they did not meet the recognition criteria for identifiable intangible assets.
None of the goodwill arising on these acquisitions is expected to be deductible for tax purposes.
- 98 -
Annual Report 2013
31.
ACQUISITION OF A SUBSIDIARY - continued
Net cash outflow arising on acquisition
US$’000
Consideration paid in cash
Less: cash and cash equivalent balances acquired
12,918
(33)
12,885
Impact of acquisition on the results of the Group
Included in the profit for the year is US$240,000 attributable to Kangzhe Lengshuijiang. Revenue for
the year includes US$3,001,000 generated from Kangzhe Lengshuijiang.
Had the acquisition of Kangzhe Lengshuijiang been completed at 1 January 2013, total group
revenue for the year would have been US$364 million, and the profit for the year would have been
US$102 million. The proforma information is for illustrative purposes only and is not necessarily an
indication of revenue and results of operations of the Group that actually would have been achieved
had the acquisition been completed at 1 January 2013, nor is intended to be a projection of future
results.
In determining the ‘pro-forma’ revenue and profit of the Group had Kangzhe Lengshuijiang been
acquired at the beginning of the reporting period, the directors have calculated depreciation and
amortisation of plant and equipment and intangible asset acquired on the basis of the fair values
arising in the initial accounting for the business combination rather than the carrying amounts
recognised in the pre-acquisition financial statements.
32.
OPERATING LEASE
The Group as lessee
The Group’s total future minimum lease payments under non-cancellable operating lease in respect
of property which fall due as follows:
Within one year
In the second to fifth years inclusive
2013
US$’000
2012
US$’000
311
360
801
113
671
914
The lease is negotiated for a lease term of 1 to 5 years at fixed monthly rental.
- 99 -
Annual Report 2013
33.
CAPITAL COMMITMENTS
Capital expenditure in respect of the acquisition of
property, plant and equipment contracted for but
not provided in the consolidated financial statements
34.
2012
US$’000
12,442
12,774
RELATED PARTY TRANSACTIONS
(a)
As at 31 December 2012, amount of approximately US$89,000 (2013: nil) included in
trade and other receivables represented the amount due from a related company, Sunpharma
GmbH ("Sunpharma"), a company in which Mr. Lam Kong, the director of the Company has
beneficial and controlling interests.
(b)
The Group entered into the following transactions with related parties during the year:
Name of
related company
Ophol
Sunpharma
(c)
35.
2013
US$’000
Relationship
Nature of
transactions
Associate
Related company
Imputed interest
Purchase of goods
2013
US$’000
2012
US$’000
198
173
230
151
The key management personnel includes solely the directors of the Company and the
compensation paid to them is disclosed in note 8.
RETIREMENT BENEFITS SCHEMES
The employees employed in the PRC are members of the state-managed retirement benefit schemes
operated by the PRC government. The PRC subsidiaries are required to contribute a certain
percentage of their payroll to the retirement benefit schemes to fund the benefits. The only obligation
of the Group with respect to the retirement benefit schemes is to make the required contributions
under the schemes.
The employees employed in Hong Kong are required to join the Mandatory Provident Fund Scheme
(the "MPF Scheme"). Contributions to the MPF Scheme are made in accordance with the statutory
limits prescribed by the Mandatory Provident Fund Ordinance of Hong Kong.
During the year, the total expense recognised in the profit or loss for the above schemes amounted to
US$2,236,000 (2012: US$1,493,000).
- 100 -
Annual Report 2013
36.
KEY EMPLOYEE BENEFIT SCHEME
The Key Employee Benefit Scheme (the “Scheme”) was adopted by the Board on 31 July 2009
(“Adoption Date”). Unless terminated earlier by the Board, the Scheme shall be valid and effective
for a term of 20 years commencing on the Adoption Date. Pursuant to the rules of the Scheme, the
Company set up a trust through a trustee (the “Trustee”), Fully Profit Management (PTC) Limited,
for the purpose of administration the Scheme. A summary of some of the principal terms of the
Scheme is set out in below.
(a)
The purpose of the Scheme is to recognise the contributions by certain employees who
have been actively involved in the business development of the Group and to establish and
maintain a superannuation fund for the purpose of providing retiring allowances for certain
employees (including without limitation employees who are also directors) of the Group, and
to give incentive in order to retain them for the continual operation and development of the
Group.
(b)
Under the Scheme, the Board of Directors (the “Board”) may, from time to time, at its
absolute discretion and subject to such terms and conditions as it may think to select an
employee (the “Member”) who completed 10 years’ services in the Group (subject to consent
of the Board if the employee completed 5 years’ services in the Group) for participation in
the Scheme for 10 years after retirement (the “Payment Year”) (subject to adjustment set out
in (d) below).
(c)
The Company will, on a yearly basis, contribute the sum equal to an amount not less than
0.5%, but no more than 3% of its after tax profits shown on the audited consolidated financial
statements of the Group, or issue such number of shares of the Company to the Trustee in
consideration of payment of such amount as the Board may determine with reference to the
aforesaid contribution as against the then market value of the shares of the Company (the
“Yearly Contributions”), subject to the Board’s approval.
(d)
The amount payable to the Members depends on the value of the assets held by the Trustee
(the “Fund”). If the value of the Fund is less than the aggregate amount of contributions
previously made by the Company, the amount payable to the Members and the Payment Year
will be adjusted by a factor derived from the value of the Fund and the aggregate amount
of contributions previously made by the Company. The only obligation of the Company is
to make the Yearly Contributions to the Fund. As such, the Scheme is classified as defined
contribution scheme.
During the year ended 31 December 2013, the Company contributed cash amounting to US$426,000
(2012: US$665,000) to the Fund and which were recognised as key employee benefit expenses in the
profit or loss in the consolidated statement of profit or loss and other comprehensive income.
- 101 -
Annual Report 2013
37.
SUBSIDIARIES OF THE COMPANY
As at 31 December 2013 and 31 December 2012, the details of the Company's subsidiaries are set as
follows:
Name of subsidiaries
(note 4)
Place of
incorporation/
establishment
and operation
CMS International (note 1)
British Virgin
Islands
Kangzhe Hunan
(sino-foreign equity joint
venture)
Issue and
fully paid
share capital/
registered capital
31 December
31 December
2013
2012
Equity interest
held by the Group
31 December
31 December
2013
2012
Directly Indirectly
Directly Indirectly
Principal activities
US$10,000
US$10,000
100%
-
100%
-
Investment holding
PRC
RMB26,240,000
RMB20,000,000
-
100%
-
100%
Production of medicines
Shenzhen Kangzhe
Pharmaceutical Technology
Development Co., Ltd.
(wholly-owned domestic
enterprise)
PRC
RMB10,000,000
RMB10,000,000
-
100%
-
100%
Investment holding
Kangzhe Pharmaceutical
Industrial Limited (note 1)
British Virgin
Islands
RMB21,288,000
RMB21,288,000
-
100%
-
100%
Investment holding
Kangzhe Shenzhen
(wholly foreign-owned
enterprise)
PRC
RMB350,000,000
RMB350,000,000
-
100%
-
100%
Marketing, promotion
and sale of drugs
Sino Talent
Hong Kong
HK$1
HK$1
-
100%
-
100%
Investment holding
Sky United
Hong Kong
HK$10
HK$10
-
100%
-
100%
Trading of drugs
Kangzhe Changde
(wholly-owned domestic
enterprise)
PRC
RMB2,000,000
RMB2,000,000
-
100%
-
100%
Trading of drugs
CMS Pharmaceutical
Agency
Malaysia
US$1
US$1
-
100%
-
100%
Trading of drugs
Kangzhe Pharmaceutical
Investment Co., Ltd.
(wholly-owned domestic
enterprise)
PRC
RMB50,000,000
RMB50,000,000
-
100%
-
100%
Investment holding
Great move
British Virgin
Islands
US$10,000
US$10,000
-
100%
-
100%
Investment holding
Generous Wealth Limited
Hong Kong
HK$1
HK$1
-
100%
-
100%
Investment holding
Kangzhe Tianjin
(wholly foreign-owned
enterprise)
PRC
RMB100,000,000
RMB100,000,000
-
100%
-
100%
Marketing, promotion
and sale of drugs
Kangzhe Guangming
(wholly-owned domestic
enterprise)
PRC
RMB18,370,000
RMB18,370,000
-
51%
-
51%
Production of medicines
Kangzhe Lengshuijing
(note 2)
(wholly-owned domestic
enterprise)
PRC
RMB10,080,000
-
-
100%
-
-
Production of medicines
Kangzhe Agricultural (note 3)
(wholly-owned domestic
enterprise)
PRC
RMB20,000,000
-
-
100%
-
-
Agriculture
Notes:
1.
2.
3.
4.
Being inactive subsidiaries.
The subsidiary was acquired on 28 February 2013 (Note 31).
The subsidiary was established on 23 January 2013.
None of the subsidiaries had issued any debt securities at the end of the year.
- 102 -
Annual Report 2013
38.
STATEMENT OF FINANCIAL POSITION OF THE COMPANY
2013
US$’000
2012
US$’000
10
276,861
10
277,844
276,871
277,854
60,000
26
40,000
21
60,026
40,021
478
154
470
206
632
676
59,394
39,345
Total assets less current liabilities
336,265
317,199
Capital and reserves
Share capital (see note 27)
Reserves
12,074
324,191
12,074
305,125
Total equity
336,265
317,199
Non-current assets
Investments in subsidiaries
Amount due from a subsidiary
Current assets
Amount due from a subsidiary
Bank balances and cash
Current liabilities
Amount due to a subsidiary
Accruals
Net current assets
Movement in reserves
Share
premium
US$’000
Balance at 1 January 2012
Profit and total comprehensive income
for the year
Dividends paid
Dividends proposed
Bonus issue (note 27)
Balance at 31 December 2012
Dividend
reserve
US$’000
Total
US$’000
269,672
1,078
15,219
12,879
298,848
(4,025)
-
38,756
(15,575)
(18,690)
-
(12,879)
18,690
-
38,756
(28,454)
(4,025)
265,647
1,078
19,710
18,690
305,125
-
-
57,992
(20,236)
(20,839)
(18,690)
20,839
57,992
(38,926)
-
265,647
1,078
36,627
20,839
324,191
Profit and total comprehensive income
for the year
Dividends paid
Dividends proposed
Balance at 31 December 2013
Capital Accumulated
reserve
profits
US$’000
US$’000
- 103 -

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Annual Report 2013

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